Research On The Co-movement Of Australian And Chinese Stock Markets

In an era of economic and financial globalization,two countries have proven themselves inextricably linked by mutual collaboration through leveraging comparative advantages in the global industry supply chain.Australia exports a great volume of raw materials to China and in turn China uses these to manufacture and increase their goods production for sale on the global markets.This deep Australasian bond is paramount in the promotion of bilateral trade success,increasing mutual financial freedom,and generally a win-win economically,ultimately increasing the overall wealth of both countries.The study of co-movement and correlation between the Australian and Chinese stock markets under the backdrop of economic globalization is of great theoretical and practical significance in order to clarify the economic and trade relations between the two countries.Abandoning the theory of Australia-China decoupling,this paper aims to provide an empirical argument in favour of the reverse,highlighting the restoration of normality in terms of Australian-Chinese economic exchange,and the further strengthening of financial cooperation,both present and future.Building upon previous studies and research combined with the current economic situation of both countries using theoretical and empirical analysis,this research aims to reinforce not only traditional economic theories about the correlations between the Australian and Chinese stock markets,but also uncover new and unique characteristics between the two countries’ stock exchanges.Overall,this paper will revolve around building a comprehensive theoretical framework regarding the co-movement between the Australian and Chinese stock markets as well as discussing the motivations and mechanisms behind this relationship.Employing theoretical and empirical analysis,this paper uses the DCC-GARCH model to depict the dynamic correlation coefficient.Correlation tests are primarily used for financial sequence analysis.Furthermore,to analyze intertemporal data,VAR modelling,impulse response analysis,Granger causality analysis,Joansen cointegration test,VECM error correction model and BEKK-GARCH model were performed.Through theoretical discussion and empirical analysis,this paper draws the following conclusions:Ⅰ-Economic research maintains that the mechanism of co-movement and correlation between the two countries’ stock markets is the inevitable outcome of economic globalization,as well as the cooperation in the global industrial chain linking back to the fundamental economic principle of comparative advantages.With the development of economic globalization,Australia and China’s respective factor endowments and comparative advantages determine the relationship of specialization and cooperation in the upstream and downstream of the global industrial chain.The impacts of changes in trade,finance,and other macro fundamentals to the two countries creates a ripple effect whereby improvements in business expectations leads to actual improvements in operating performance and ultimately benefiting share prices and market performance of both countries.Due to increasing globalization,the comovement between Australia and China’s stock markets follows along with it,growing stronger and stronger.Ⅱ-Trend analysis shows that the co-movement between the two countries’ stock markets can be characterized into two modes,stable enhancement in the long term and volatile fluctuations in the short term.External shocks,both idiosyncratic and systematic,will tighten the correlation between the two stock markets in the short term,and then eventually declining after the impact gradually fades.The reformation of the RenMinBi’s(RMB)exchange rate mechanism in 2005 opened the door for China’s stock market to the world,and become fundamental in the linkage of Australia’s and China’s stock markets.In the process of economic development and growth between the two countries due to globalization,bilateral trade and financial transparency of the two countries have continuously improved,leading to the continuous reinforcement of the co-movement of the stock markets of the two countries,further strengthening the abandonment of the decoupling theory.Ⅲ-Research on the mechanism of exogenous influence highlights that the comovement between Australian and Chinese stock markets is primarily affected by bilateral trade between two countries.The co-movement of various industry sectors is mainly related to the deep cooperation of the global industrial chain between Australia and China,with Australia’s raw material industry and China’s manufacturing industry sectors being the most representative industries of this phenomenon.These two industries face the brunt of the global market and are heavily affected by global market fluctuations.As these two industries are heavily complementary,it goes without saying that the co-movement between them is strong and rigid,no matter what country-specific systematic macroeconomic shocks arises.Ⅳ-Research on endogenous mechanisms shows that liquidity gap is an important endogenous influencing factor of the linkage between the Australian and Chinese stock markets.When market conditions are poor,the liquidity gap formed between the two stock markets will cause the flight-to-liquidity phenomenon between the markets.The overflow of returns and liquidity causes the trend of the stock markets of the two countries to tend towards each other,forming co-movement between the two markets.Ⅴ-Global events create extreme short-term impacts on the co-movement factor.Extreme events such as the 2009 Global Financial Crisis(GFC),and the COVID-19 outbreak coupled with deteriorating geopolitical relations between China and Australia exacerbate the heavy short-term impacts.Furthermore,the contagion and agglomeration effect further increase the shock to the co-movement factor.However,research dictates that in the long run as the effects subside,the co-movement factor stabilizes and returns to normality,suggesting a natural synergistic relationship between Australia and China’s stock markets.Through the study of external influencing factors,this paper finds that current Australia-China relations are ultimately influenced by Sino-America relations.Based on the conclusion that the co-movement between the Australian and Chinese stock market is due to the linkage between the two economies under the backdrop of economic globalization,this paper puts forwards the following arguments and suggestions:In terms of a macroeconomic perspective,it is imperative that all parties realize that economic collaboration and partnership is the cornerstone of the relations between the two countries.We should fully realize the importance and the weight that the United States has in the political and economic relations between Australia and China.This heavy influence by the United States causes Australia-Chinese relations to be shrouded in the sphere of US-China relations.Continued progress must be made to minimize foreign political interference,reduce isolationist policies,and boost economic confidence to face various issues arising from globalization and to quell the tension between the two countries.This paper recommends strengthened communication with China,putting aside differences to solve problems economically and developmentally.Analogous to this point,both countries should further reinforce cooperation in the global industrial chain,continuing to open trade and financial markets to each other hence establishing an amicable long term political and economic relation.Furthermore,economic decision makers are encouraged to design macroeconomic and trade policies around the global industrial chain with a strong emphasis on globalization kept in mind,taking full account of the smooth and diversified supply chains,and ensuring the security and stability of the supply chains for the export of bulk raw materials and commodities.Finally,this paper calls upon financial regulatory authorities to ease the discriminatory politically-motivated policy against foreign investment,and to actively engage in the process of the internationalization of the RMB.The financial sectors of Australia and China should further open up to each other,to promote the flow of capital at home and abroad,and promote the common prosperity of the two stock markets.Analogously,robust risk prevention mechanisms must also be implemented,strengthening the supervision of cross-border capital flows,blocking the spread of cross-border market risks,and to further study and prevent stock market risks whilst expanding financial liberalization.This paper also suggests that investors seize the opportunities of China’s rapid development,leveraging this growth to discover new cross-market arbitrage opportunities,increase cross-market portfolio investment,and diversify investment risk.It is imperative that financial institutions pay attention to the change in the market demand of Australia and China brought about by economic globalization and execute investment and financing projects that meets the common interests of both counties.Lastly,investors should be proactively participating in the new opportunities brought forth by China’s further deregulation of the financial sector,taking advantage of the rapid development of China.