An Analysis Of The Time-varying Co-movement Between China And Foreign Stock Markets

The stock market is one of the most important financial marketplaces globally,directly linked to a country’s economy.Global stock markets have entered a collective hysteria triggered by the crises.Growing interlinkages across international financial markets mean that the unification of stock market risks across borders plays a significant role in global portfolio diversification and extensive economic policymaking.Previous research focused on stock markets when exploring possible safe-haven,hedging,or diversification benefits.Fluctuations in one market to other markets and instability of stock markets are associated with risk-return in the stock markets.In recent years,severe worldwide economic shocks have influenced stock markets,posing practical challenges that must be analyzed immediately.This study assesses the past decades’ stock market interrelationship of emerging Asian and developed economies with China.This study focused on risk-return and co-movements between China and foreign stock market during the sample period,especially Asian,US financial,and the Chinese stock market crash.This study is based on classical theories such as the law of one price,modern portfolio theory,efficient capital market theory,stock market interdependence theory,and capital asset pricing model.We employed wavelet family models and daily data sourced from the DataStream.We used the individual wavelet power spectrum,cross-wavelet transform,wavelet coherence,wavelet granger causality,wavelet DCC-GARCH,portfolio,hedging effectiveness,and wavelet VaR for multi-country diversification to determine the relationship of risks,returns,and portfolio between China and the selected stock markets.These models have the power to analyze time-frequency co-movement between China and foreign stock markets.This study proposed the concept of an interdependent link between stock market risk and return,which has long been a source of debate among rational stock investors and finance scholars worldwide.First,this study intends to examine the time-varying comovement among Asian emerging and developed stock markets with China stock markets.These findings show that throughout the crises,as in Asian Crises 1997,Global Financial Crises 2008,and the Chinese stock market crash in 2015,the comovement patterns increased,and high frequencies were observed.Japan’s market is localized at a low frequency of(512-1024)with the highintensity region,where France,the US and Germany also show the same behavior in 1993,1997-98 and 2007-08.China and Indonesia’s stock market two-time series are localized at the highest level of covariance from 1993-2003 and 2007 to 2009.China-Singapore pair.China-Malaysian pairs are localized from 1993 to 2000 and 2007 to 2008 at the highest level of covariance.China-Malaysian covariance is high(1993 to 2000 and 2007 to 2008).In 2007-08,a higher level of covariance was observed between China and US pair at low frequency with China in-phase and leading.The co-variance between China and Japan pair is high in both low and high-frequency in 1993,1997-98 and 2007-08.US,UK,France and Germany show diverse relationships with the Chinese stock markets during different crisis episodes.Furthermore,China stock market leads the stocks markets of Singapore,Malaysia,Pakistan and India in both long and short phases during a crisis.In contrast,China’s stock markets have a lead-leg relationship with Indonesia in both the long and short run during all crisis episodes.The dependency strength among the stock markets has increased in the crisis periods,implying increased and decreased short and long-term benefits for the investors by hedging stocks against each other.Second,combining the superior features of parametric and nonparametric methods,we provide evidence of different risk comovement in the short,medium,and long-run for both developed and emerging markets over time.China had short and long-term links with emerging and developed markets during the Asian crisis(19971998).Meanwhile,after the US global financial crisis(2007-2008),it was seen that China has long-run synchronization with developed countries and short and long-run correlation with emerging countries.Furthermore,China leads the stock market of India,Indonesia,and Malaysia during the period 64-128 at high frequency and France,Japan,and the US during the Chinese market crash(2015-2016).Causality findings reveal a bi-directional causality between China and developed stock markets over a short time scale and more prolonged investment.Significant evidence of risk co-movement across time scales supports the hypothesis that China’s comovement is sustainable with foreign stock market.Notably,this appears to favor developed stock markets over Asian stock markets,showing that financial development and sustainability are more important than geographic closeness in determining market co-movement.Third,the results indicate the dynamic conditional covariance and the correlation between China-emerging and China-developed foreign stock market for the daily stock market.Based on optimal weights,investors should change their investments based on stock market volatility and hedging diversifications to adjust their higher expected returns in(a)China for a portfolio of China-emerging countries and(b)China for a portfolio of Chinadeveloped countries during the crises.All hedge ratios are higher during the crisis period.The Chinese market crash implies a higher hedging cost than the Asian and the US global crises period.The UK,USA,and Japan are strong,safe havens and a hedge for China.At the same time,Pakistan,Indonesia,and Malaysia serve as diversifiers for the China market during the turmoil and full sample periods.From a financial perspective,the strength of comovement between developing and developed economies has affected the VaR(Value at Risk)levels of a multi-country portfolio.These findings are helpful in asset allocation decisions of individual and institutional portfolio investors worldwide,especially during a crisis.The findings of risk comovement between different stock markets would be of greater interest for policymakers to stabilize the economy and financial markets during various crises.In summary,theoretically,this study concludes that stock market risk-return,global financial crisis,information,and market interdependencies significantly affect the comovement of the financial market among these stock market portfolios.Furthermore,there is strong coherence in the short and long frequencies among the stock markets.However,the outcomes reveal that financial markets such as emerging and developed markets may perform the same role as investment portfolios and offer new portfolio diversification or hedging opportunities.As implications,investors should consider how China and its partners are correlated during crises at a specific scale and adjust their diversification strategy across these markets.This study recommends that the Security and Exchange Commission(SEC)and other relevant authorities develop a market structure that will reflect accurate stock market information for future investment decisions.Policymakers of these countries should also be aware of their stock market comovement nature and time-varying frequency to adapt to changes during local,regional,and global shocks.