An Empirical Research On The Changes Of Risk Dependence Among Domestic,Hong Kong And London Stock Markets

With the development of economic globalization and financial integration,the opening degree of countries?regions? around the world and the dependence among financial markets has gradually increased.Investment liberalization has changed the capital allocation and operation mode of financial markets,while capital has brought about a series of problems such as the frequent outbreak of financial crises while promoting financial deepening and improving market efficiency.At the same time,the opening degree of China to the world is deepening.The introduction of QDII and QFII systems makes it possible that domestic and foreign residents can invest across markets.In addition,the Shanghai-Hong Kong Stock Connect program,Shenzhen-Hong Kong Stock Connect program and Shanghai-London Stock Connect program have also promoted the flow of capital.The policy of increasing the opening degree of the domestic stock market has increased the linkage between domestic and the international stock markets,making the domestic stock market more vulnerable to fluctuations from international stock markets,and also reducing the risk diversification ability of different regional or national portfolios.So,the difficulty of risk supervision is further increased.While,the measurement of the complex dependence among markets is the basis of financial risk management,and it is also the contention of academic research at home and abroad in the past decade.This paper is about the research of structural changes in the development of the entire stock markets in Shanghai,Shenzhen,Hong Kong and London with the background of the policy of Shanghai-Hong Kong Stock Connect program,Shenzhen-Hong Kong Stock Connect program and Shanghai-London Stock Connect program.This paper selects the daily closing price data of the Shanghai Composite Index,Shenzhen Stock Exchange Index,Hang Seng Index and FTSE 100 Index as the research objects,and takes the logarithmic rate of return of the closing price.Considering that financial assets often exhibit typical characteristics such as peak,fat tail,bias,autocorrelation,and conditional heteroscedasticity,ARMA(1,1)-FIAPARCH(1,d,1)-Skewed t model is selected to filter it into standard residual.And combined with the EVT extremum theory,the edge distribution is constructed.On the other hand,considering the complexity of the dependence structure among financial assets,five types of MRS Copula models(MRS Normal Copula,MRS Clayton Copula,MRS Gumbel Copula,MRS SJC Copula,MRS T Copula)are introduced to describe the dependence among stock markets,which are compared the characterization effect with the static Copula models and the ordinary time-varying Copula models.For different markets,the appropriate Copula model is selected according to the AIC criteria.However,the MRS Copula model can not accurately capture the switching point.In this paper,the BP breakpoint test is used to capture the specific time of the switching point,and the time interval is divided according to it.And then,do research about the changes of risk dependence.Through empirical analysis,the conclusions are as follows:Firstly,the ARMA(1,1)-FIAPARCH(1,d,1)-Skewed t model can be used to characterize the typical characteristics of the rate of returns of the four stock indices.Secondly,the time-varying MRS Copula model is better than the static Copula and the ordinary time-varying Copula model in the dependence of Shanghai,Shenzhen,Hong Kong and London stock markets,which also reflects the existence of dependence switching between Shanghai,Shenzhen,Hong Kong and London stock markets.Thirdly,the subprime crisis has caused a dependence switching among Shanghai,Hong Kong,Shenzhen and Hong Kong stock markets.However,the opening of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect did not cause significant changes of the dependence.That means it did not achieve the expected results in a short term.Fourthly,compared to the Shanghai-Hong Kong,Shenzhen-Hong Kong and Hong Kong-London stock markets,the degree of dependence between Shanghai and London is much lower,which not only shows that the Chinese domestic stock market has not yet fully integrated with the international stock markets and the information transmission from the mature international stock markets has little impact on the Chinese domestic stock market,but also reflects the necessity of Shanghai-London Stock Connect program.Fifthly,the QFII system,the Asian financial crisis,the subprime mortga ge crisis and the global financial crisis caused by it have led to structural breakpoints in relevant markets,and the dependence has increased significantly.However,Shanghai-Hong Kong Stock Connect program and Shenzhen-Hong Kong Connect program have not caused structural breakpoints.Finally,based on the empirical results,the following suggestions are proposed:Firstly,because of the leverage effect of the domestic stock market,the regulatory authorities should pay much attention to the bad news and prevent the impact on stock market,especially in Shanghai stock market.Extreme risk fluctuations can be prevented if appropriate measures are taken,which will be helpful to reduce the overall volatility of the domestic stock market.Secondly,before the financial crisis broke out,the dependence based on the MRS Copula model will have a transition from a low dependence state to a high dependence state.Therefore,when there is a change in dependence state,the regulatory authorities and investors must remain highly vigilant.Learning of the dependence changes in time,the regulatory authorities can do a good job in preventing extreme risk contagion and investors can adjust the asset allocation ratio in the stock market,which can optimize the investment portfolio and reduce the overall risk.Thirdly,the QFII system,the Asian financial crisis,the subprime mortgage crisis and the global financial crisis caused by it have led to structural breakpoints in relevant markets,and the dependence has enhanced significantly.Therefore,when the market mechanism changes and the financial crisis breaks out,the regulatory authorities and investors should take precautions to cope with the risks brought about by the linkage between markets.Fourthly,Shanghai-Hong Kong Stock Connect program and Shenzhen-Hong Kong Stock Connect program did not increase the dependence between the domestic and Hong Kong stock markets in a short time.The reason may be the restrictions of trading stocks and trading quota.If some restrictions are loosened,such as increasing the types of tradable stocks and amount,reducing the standard of entering the market appropriately or increasing the cognition to it,the effect will be better.Fifthly,Hong Kong stock market,compared to domestic stock market,which is a mature international capital market,has stronger dependence with the London stock market.It also reflects the fact that once the Shanghai-London Stock Connect program is carried out,the internationalization degree of Shanghai stock market will be promoted.At the same time,the domestic market will be more vulnerable to impacts and influences from international capital markets.Therefore,the regulatory authorities should pay much attention to the risk spillover effect,establish preventive measures such as crisis identification and risk infection warning,and prevent the occurrence of risk contagion.