Research On The Correlations Of The Stock Market, Bond Market And Fund Market

With the development and improvement of the securities market in China, thefunds are increasingly favored by investors especially the individual investors.Accurate depiction of the dependency structure between financial markets is the basisof portfolio and risk management. In order to optimize the effect and reduce the risk ofportfolio, it’s very necessary to analyze the characteristics of the dependency structurebetween stock market, bond market and fund market in China.There are many advantages using Copula theory to analyze the dependencystructure between variables, it can well capture the tail dependence between financialmarkets. This paper has combed the Copula theory and elaborated the principle andcharacteristics in application of several common Copula function including theconstant related Copula and time-varying Copula in detail.In the empirical part, we use ARMA-GARCH (1,1)-t model to fit the marginaldistribution, then analyze the characteristics of the dependency structure between stockmarket, bond market and fund market in Shanghai market and Shenzhen marketrespectively in the basis of three constant related Copula function and SJC Copulafunction. The results shows: firstly, it’s suitable to use ARMA-GARCH (1,1)-t modelto fit these five return series. Secondly, there exist tail dependence and positive linearcorrelations between the stock market, fund market and bond market, but thecorrelation levels differ clearly. Of them there’s strong correlation between the stockmarket and fund market, while the correlations between the fond market and bondmarket as well as between the stock market and bond market are very weak; besides,all the under tail dependence are greater than the upper tail dependence. Thirdly, thecorrelations between these markets are significantly time-varying, and the trend is verysimilar. Fourthly, there are some differences between Shanghai market and Shenzhenmarket, the correlation between the stock market and fund market in shanghai isstronger than that in Shenzhen, while the correlation level between the stock marketand bond market in Shenzhen is slightly higher than that in shanghai, and thecorrelation level between the fund market and bond market in Shanghai and Shenzhenare roughly the same. Fifthly, festivals, great news of enterprises, as well as nationaleconomic policies will strengthen the correlations between the three markets;furthermore, tail dependence is strongly associated with national macroeconomic policy，when there’s little money in the stock market, the under tail dependencebetween the three markets will be stronger.From the perspective of risk diversification, there have a certain risk to invest theportfolio consisting of stocks and funds whether in Shenzhen or Shanghai market. Inaddition, the risk in Shanghai market is greater than that in Shenzhen market, soinvestment result of the portfolio consisting of stocks and funds in Shenzhen market isbetter than Shanghai market; The risks of the portfolio consisting of bonds and fundsas well as stocks and bonds are low in both Shanghai and Shenzhen, but in comparison,the effect of portfolio composed by stocks and bonds in Shanghai market is better thanShenzhen market. Overall, compared with Shanghai market, risk diversificationfunction of fond in Shenzhen market is more powerful.