Study On The Correlations Between Stock And Government Bond Markets Under Economic Policy Uncertainty In China

Correlation is a very important topic in the capital markets, which concerns investor’s beneficial ability, market integration, and so on. Meanwhile, the changes of the economic policy can influence investors’ behaviours, even leading to a "flight to quality" phenomenon, which affects the correlations between the stock and bond markets. This dissertation investigates China stock-bond correlations and the effects of China economic policy uncertainty (EPU, hereafter) on the correlations. After the detailed analysis of the correlations between China stock and government bond markets, this dissertation examines how China EPU affects the correlations.This dissertation uses regime switching dynamic conditional correlation model to study the correlations between China stock and government bond markets. From January,2003 to June,2015, the correlations have two regimes:positive correlations and slightly negative correlations. However, the slightly negative correlations account for most of the time, only in the periods from January,2003 to May,2004 and from May,2014 to May,2015, the positively correlative regime dominates the correlations. The regime switching of the correlations is not obvious, which indicates that the correlations are comparatively stable, that is, the correlations have some persistence. The weak links and slightly negative correlations between the two markets means that in China, government bond is a hedge against stock and a safe haven in extreme stock market conditions.Employing the eccentricly asymmetric dynamic conditional correlation model with exogenous variables, the asymmetry in the correlations and the effects of EPU on the correlations are explored. The empirical research indicates that the asymmetry in the correlations between China stock and government bond markets is not statistical significant and the effects of EPU on the correlations are also symmetric. The increase in EPU will lead a decline in the correlations between the stock and government bond markets, while the decline in EPU will increase the correlations. The negative effects of EPU on the correlations indicate that there are "flight to quality" phenomenons between China stock and government bond markets. The empirical research also finds that the effects of one-standard-variance rise in the change of EPU will diminish with time going on and last approximate 14 months.Smooth transition dynamic conditional correlation model and double smooth transition dynamic conditional correlation model are also used to study the trends in stock-bond correlations and the impacts of EPU on the trends. When China economic policy becomes more uncertain, China stock-bond correlations have a decreasing trend. The speed of the effects of EPU on the trends in stock-bond correlations is very high. In other words, the responses of the correlations between China stock and government bond markets to the changes of China economic policy uncertainty are very dramatic. The correlations between China stock and government bond markets show a decreasing trend, when time elapses. January,2007 is the point that the correlations between China stock and government bond markets turn to negative from positive. The transition speed of the correlations with time is very low.