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The paradox of Chinas China and

G5 stock
international stock market markets
co-movement
Evidence from volatility spillover effects 235
between China and G5 stock markets
Yusaku Nishimura and Ming Men
School of International Trade and Economics,
University of International Business and Economics,
Beijing, Peoples Republic of China
Abstract
Purpose The purpose of this paper is to examine the daily and overnight volatility spillover effects
in common stock prices between China and G5 countries and explain their implications on the basis
of empirical results.
Design/methodology/approach The analysis utilizes the exponential generalized autoregressive
conditional heteroskedasticity (EGARCH) model, the cross-correlation function approach, and
realized volatility for daily and intraday stock price data that cover the period from January 5, 2004 to
December 31, 2007.
Findings Principally, the paper concludes the following: strong evidence of short-run one-way
volatility spillover effects from China to the US, UK, German and French stock markets is observed
and the test results indicate that Chinese investors were not rational and Chinas stock market entered
a speculative bubble period after the second half of 2006.
Originality/value Contrary to widespread belief, the empirical results suggest that a small (China)
stock market has significant influence on a large (G5) stock market but not vice versa. This paradox
is interpreted as a particular phenomenon existing together with the rapid economic development and
severe capital regulation in China.
Keywords Stock markets, Volatility, Information systems, China
Paper type Research paper

1. Introduction
On February 27, 2007, the Shanghai Composite Index and Shenzhen Component Index
fell by 8.84 and 9.29 percent, respectively, which was the largest one-day percentage
decline in Chinas stock market in the last decade. This China shock spread
throughout the global financial markets quickly and led to a simultaneous drop in
global stock prices. This event raised concerns about whether China had entered a new
development stage and whether Chinas economy had started to play an important role,
not only in the field of international trade, but also in international finance.
Market deregulation and liberalization have increased the globalization of financial
markets, which in turn affects the interdependence of asset prices across these markets.
Along with the advances in econometrics and the availability of frequency data, studies
on the nature of relationships among stock price movements across markets have been
attracting more academic attention over the past two decades. Many papers have
empirically studied the co-movement of stock prices across international markets. Journal of Chinese Economic and
Hamao et al. (1990) analyzed return and volatility spillover effects around the Black Foreign Trade Studies
Vol. 3 No. 3, 2010
Monday stock market crash of 1987 in the context of the USA, the UK and Japanese pp. 235-253
stock markets over the three-year period from April 1, 1985 to March 31, 1988. They # Emerald Group Publishing Limited
1754-4408
divided daily close-to-close returns into their close-to-open and open-to-close components DOI 10.1108/17544401011084316
JCEFTS in order to analyze the spillover effects on the opening price and on prices after the
opening of trading separately. They defined the foreign market volatility as the squared
3,3 residual derived from an MA(1)-GARCH(1,1)-M model[1] (referred to as volatility
surprise), and appended it to the domestic markets conditional variance specification.
Evidence of volatility spillovers from the USA to Japan, the UK to Japan and the USA to
the UK was observed, but no volatility spillover effects in other directions were found for
the pre-October 1987 period.
236 Watanabe (1996) studied return and volatility spillover effects from the UK and the
USA to Asian stock markets[2] by using the daily closing stock price from February 8,
1990 to June 27, 1994. The volatility was calculated based on the volatility estimation
procedure proposed by Schwert (1990). Regression analysis was then used to study
whether there was a spillover effect or not. As for return spillovers, positive and
statistically significant effects were reported from the USA to eight Asian markets
except for Indonesia and from the UK to five Asian markets (Hong Kong, Singapore,
Malaysia, the Philippines and Thailand). With regard to volatility spillovers,
significantly positive effects were reported from the USA to Japan, Indonesia and
Thailand, but there was no significant effect from the UK to other countries.
Moreover, many academic papers have found the existence of international
co-movement of stock markets. Examples include Eun and Shim (1989), Kasa (1992),
Cheung and Mak (1992), Masih and Masih (1999), Ng (2000), Jang and Sul (2002), Hamori
(2003) and Khalid and Kawai (2003). Although these studies analyzed interdependence of
stock returns and volatility by using different methods, data and sample periods, the
major findings from these studies may be summarized as follows. First, stock markets
throughout the world are becoming more interdependent in the global context of financial
liberalization and deregulation. Second, the US market can be considered as a global
factor and was found to lead most of the stock markets at least before the crash of 1987.
Third, there is strong evidence of co-movement among international stock markets
during or immediately after a crisis, e.g. the Black Monday stock market crash of October
1987, the Asian financial crisis in 1997, Russian governments default in 1998, etc.
In recent years, the issue of stock market co-movement between China and
international stock markets has gradually attracted academic attention. Han and Xiao
(2005) studied the return spillover effect between China and US stock markets using
the MA(1)-GARCH(1,1)-M model. As per Hamao et al. (1990), their sample consisted of
intraday open-to-close and close-to-open return between January 1, 2000 and December
31, 2004. The results showed very weak return spillover from China to the USA, but no
evidence was found of spillover from the USA to China.
Johansson and Ljungwall (2009) investigated return and volatility spillover effects
among the different stock markets in the Greater China region (China, Hong Kong and
Taiwan) using the multivariate exponential GARCH (EGARCH) model. Their sample
consisted of weekly stock indices on the Dow Jones China 88 (an index that includes the
major stocks listed on the Shanghai and Shenzhen stock exchanges), the Hang Seng
Index and the Taiwan Weighted Index during the period January 5, 1994-December 31,
2005. They found that there was significant spillover effect in both returns and volatility
among the different markets. However, the China stock market is somewhat less related
to the other two markets.
Lin et al. (2009) estimated the dynamic conditional correlation model proposed by
Engle (2002) to accommodate changing variance, covariance and correlations. They
used weekly stock index returns from December 28, 1992 to December 29, 2006 for the
main Chinese markets (both A-share and B-share), the other five largest Asian markets
(Japan, Australia, Hong Kong, Taiwan and Singapore), the US market and the three China and
main European markets (the UK, Germany and France). This study revealed that A- G5 stock
share indices have never been correlated with world markets, and B-share indices
exhibit a low degree of correlation with western markets (0-5 percent) and a slightly markets
higher degree of correlation with other Asian markets (10-20 percent).
In addition, some existing studies have examined the co-movement relationship in
stock prices across markets. Examples include Hong et al. (2004) and Nishimura (2009). To
the best of our knowledge, the majority of previous empirical studies in China typically
237
examine the weekly or daily spillovers. Far less attention has been paid to the intraday or
overnight co-movement relationship between China and other international stock markets.
This paper focuses mainly on the volatility spillover effects in common stock prices
between China and G5 countries (the USA, the UK, Japan, Germany and France). We
examine daily and intraday stock returns over the four-year period from January 3,
2004 to December 31, 2007. The EGARCH model, the cross-correlation function (CCF)
approach and realized volatility are applied to study the daily and overnight
transmission mechanisms of stock return volatility across international stock markets.
The primary purpose of this paper is to examine the internationalization and
globalization of Chinas stock market by time-series analysis. Furthermore, we also
attempt to reveal the volatility transmission mechanisms and explain its implications
on the basis of our empirical results.
The rest of the paper is organized as follows. Section 2 describes sample data and
presents some descriptive statistics for the daily return series. Sections 3 and 4 empirically
study the volatility spillover effect between China and G5 stock markets. Section 3 applies
the CCF approach, whereas section 4 employs daily and intraday realized volatility. Section
5 concludes with discussion on the causes and consequences of the spillover effects.

2. Data analysis of daily stock return series

As Table I shows, the sample includes China and G5 countries. In each countrys stock
market, we chose the most comprehensive and diversified stock index, i.e. the Shanghai
Composite Index for China (CHN), the Dow Jones Index for the United States (USA), the
FTSE 100 Index for the United Kingdom (UK), the Nikkei 225 Index for Japan (JPN),
the DAX Index for Germany (GER) and CAC 40 Index for France (FRA). The data were
obtained from the Bloomberg database. It should be emphasized that there are two
major stock indices in China, the Shanghai Composite Index and Shenzhen Component
Index. By the end of 2007, the total market capitalization and total negotiable market
capitalization of the Shanghai Stock Exchange were 26,983.89 billion and 6,453.22
billion RMB, much greater than those of the Shenzhen Stock Exchange, which were
5,730.2 billion and 2,853.22 billion RMB, respectively. Furthermore, the total turnover
of the Shanghai Stock Exchange was 30,543.4 billion RMB and total shares traded were

Countries Abbreviation Securities exchange Stock index

China CHN Shanghai Stock Exchange Shanghai Composite Index

United States USA New York Stock Exchange Dow Jones Index
United Kingdom UK London Stock Exchange FTSE 100 Index
Japan JPN Tokyo Stock Exchange Nikkei 225 Index Table I.
Germany GER Frankfurt Stock Exchange DAX Index Stock indices and
France FRA Euronext Paris CAC 40 Index abbreviations
JCEFTS 2,432.54 billion, also much greater than those of Shenzhen Stock Exchange, 18,764.56
3,3 billion and 1,207.84 billion RMB[3], respectively. Based on this comparison, it is clear
that the Shanghai stock market is more active than Shenzhen. Consequently, it makes
sense that the Shanghai Composite Index be used for the empirical analysis.
With regard to sample period, if the sample period is too long, the forecast accuracy of
the model generally gets worse. One-step forecast accuracy is particularly important in
238 the ARCH-type models because the volatility 2 is a forecast value of "2 at t  1 period.
Moreover, as mentioned earlier, there are forces raising stock market co-movement
during periods of financial crisis. In order to get rid of the bias caused by financial
market turmoil, we chose a sample period ranging from January 5, 2004 to December 31,
2007. The problem in studying volatility spillover effect among international markets is
the existence of non-synchronous holidays. In this paper, we eliminate the data when the
market was closed[4]. The daily stock return Rt is defined as the first difference between
the closing log-price on consecutive trading days expressed in percentage terms, i.e.
Rt ln Pt  ln Pt1  100, where ln is a natural logarithm function, Pt and Pt1
are the daily closing stock prices at time t and t  1, respectively.
Table II summarizes the basic features of daily return series. Mandelbrot (1963) and
Fama (1965) found some stylized facts concerned with the characteristics of financial
returns. These characteristics are summarized as follows:
. The distribution of return on financial assets has more leptokurtosis and fatter
tails than the normal distribution.
. Stock returns are negatively skewed (a long left tail distribution).
. Stock returns exhibit characteristic of volatility clustering.
As shown in Table II, kurtosis values are significantly greater than 3.0 and skewness
values are significantly negative for all markets, indicating that the distribution of
daily returns are leptokurtic and skewed to the left. The Q2(10) denotes the

CHN USA UK JPN GER FRA

Mean 0.1334 0.0268 0.0385 0.0375 0.0737 0.0471

(0.0551) (0.0248) (0.0269) (0.0385) (0.0315) (0.0301)
Skewness 0.5660 0.3816 0.4036 0.3179 0.3722 0.3317
(0.0802) (0.0802) (0.0799) (0.0805) (0.0796) (0.0795)
Kurtosis 7.5281 4.6330 5.5893 6.8698 4.6083 4.1333
(0.1605) (0.1605) (0.1599) (0.1611) (0.1593) (0.1589)
Standard deviation 1.6813 0.7562 0.8234 1.1724 0.9693 0.9273
Jarque-Bera 845.99* 126.17* 287.80* 592.74* 123.81* 68.25*
Ljung-Box Q(10) 13.714 6.695 28.359* 6.516 10.357 14.989
Q2(10) 50.215* 93.804* 321.488* 48.347* 48.938* 138.657*
ADF C 31.53* 32.16* 31.02* 34.19* 33.58* 33.58*
C and TR 31.85* 32.16* 31.03* 34.17* 33.56* 33.56*

Notes: *denotes the significance level at 1 percent. Standard errors are in parentheses. LM (10) is
the Lagrange multiplier test statistic for the null hypothesis that there is no ARCH effect up to
order ten. Q(10) and Q2(10) are the Diebolds (1988) heteroskedasticity-corrected Ljung-Box
Table II. statistics with lag ten for daily returns and squared returns, respectively. C denotes that the ADF
Descriptive statistics regression includes constant term only. C and TR denote that the ADF regression includes both
of daily stock returns constant and liner time trend; sample period: January 5, 2004 to December 31, 2007
heteroskedasticity-corrected Ljung-Box statistics following Diebold (1988)[5]. It is a test China and
statistic for the null hypothesis that there is no autocorrelation up to order 10 for squared G5 stock
return. For each m equaling 1; 2; . . . ; 10, series Q2(m) reject the null hypothesis at 1
percent significance level for all stock markets. Since the squared return can be considered markets
as a proxy for volatility, Rt2 2t z2t , it is also possible to consider significant
autocorrelation of Rt2 to be volatility clustering. These results indicate that Chinas and G5
countries daily stock returns are consistent with above three types of the well-known 239
facts. Furthermore, the Jarque-Bera statistics is used for testing whether the return series
is normally distributed or not. The results show that the null hypothesis of normal
distributions is also rejected at 1 percent significance level for all series. In addition,
standard deviation is usually considered as an acceptable measure of risk in the stock
market. CHN has the highest standard deviation, 1.6813, and USA has the lowest one,
0.7562. The highest mean daily return is 0.1334 percent for CHN and the lowest one is
0.0268 percent for the USA. According to the value of mean and standard deviation, it is
reasonable to conclude that trading in Chinas stock market involves high risk-high return.
In the time-series approach, a pretest for a unit root is usually required before
estimating the model. A well-known characteristic of stock index series (level series) is
that they are level and trend non-stationary. Volatility models are required to make use
of first-order differential data (return series). In this paper, the existence of a unit root is
examined by using the augmented Dickey-Fuller (ADF) test (Dickey and Fuller, 1979,
1981). Since the result of a unit root test can be sensitive to the lag length, it is
important to be careful in choosing a model. The Schwarzs Bayesian information
criterion (SBIC) is usually used to select the appropriate lag length, and smaller values
of SBIC are preferred[6]. The empirical results in our study indicate that the null
hypothesis, the unit root is included, is rejected for all specification. It suggests that
these variables are stationary and can be used in volatility models.

3. A causality-in-variance test using the CCF approach

3.1 Cheung-Ng causality test
In this section, we apply the two-step procedure developed by Cheung and Ng (1996). Step
one: estimate appropriate AR-EGARCH model for each univariate time series to obtain
their standardized residuals. Step two: the CCF of squared standardized residuals are
used to detect causality-in-variance[7] between Chinas and G5 countries stock markets.
3.1.1 Volatility model and methods to choose lag length. The following EGARCH
model proposed by Nelson (1991) is one of the powerful tools to capture the asymmetric
volatility[8]. The AR(k)-EGARCH(p, q) model is specified as follows:

X
k X
4
Rt c h Rth l D l " t "t jIt1  N0; 2 1
h1 l1

X
p X
q
ln2t ! i ln2ti j jztj j j ztj 2
i1 j1

Equation (1) shows the conditional mean equation and is specified as the AR(k) model.
Here, Rt denotes daily stock returns. It1 denotes information set available at time
t  1. Dl denotes the day-of-the week dummy variables that takes a value of 1 for a
specific day of the week and 0 otherwise (eliminate bias for potential day-of-the-week
JCEFTS effect)[9]. Equation (2) shows the conditional variance equation and is specified as the
3,3 EGARCH(p, q) model. Here, zt denotes the standardized residuals zt "t =t .
The AR-EGARCH model estimates can be very sensitive to the lag length.
Therefore, it is important to be cautious in choosing a model. In this paper, we take a
three-step procedure to choose the optimal lag length of the AR(k)-EGARCH(p,q)
model. In the first step, the choice of k is carried out among k 1; 2; . . . ; 15, and then
determine the optimal lag length k* on the basis of SBIC. In the second step, the AR(k*)-
240 EGARCH(p,q) models are estimated by using various lag lengths p 1; 2 and q 1; 2,
and then the optimal lag length combination of p* and q* is determined by minimizing
one of the SBIC. Finally, in the third step, Diebolds (1988) heteroskedasticity-corrected
Ljung-Box test is performed on the standardized residuals and their squares are
obtained from AR(k*)-EGARCH(p*, q*) model. If both test statistics Q and Q2 cannot
reject the null hypothesis that there is no autocorrelation, lag lengths k*, p*, q* are
determined as the optimal one. If either one rejects null hypothesis, go back to the
previous step and estimate AR(k* 1)-EGARCH(p, q) models again. The procedure is
repeated until both of them cannot reject the null hypothesis.
3.1.2 The CCF approach. The CCF approach[10] proposed by Cheung and Ng (1996)
is employed to analyze the causality-in-variance between Chinas and G5 countries
stock markets based on the empirical results of the AR-EGARCH model.
The following procedure, for instance, is the causality-in-variance tests between the
US and Chinas stock market. Consider a bivariate stationary stochastic processes Ri;t
(i Usa, Chn, t 1; 2; . . . ; T). Let us assume that stock return series Ri;t can be
written as the following formula:

Ri;t Ri;t Ri;t zi;t Ezi;t 0; Varzi;t 1 3

where

Ri;t1 ERi;t1 jIt ; 2Ri;t1 ERi;t1 Ri;t1 2 jIt  4

Here, Ri;t represents mean equation (conditional mean) that is specified as an AR(k)
model of Equation (1). 2Ri;t represents variance equation (conditional variance) that is
specified as an EGARCH(p,q) model of Equation (2). zi;t is a white noise process with
zero mean and unit variance. It denotes information set available at time t.
Ut and Vt are defined as the squared-standardized residual for return series RUsa;t
and RChn;t , respectively. They are obtained from Equation (3):

2RUsa;t ^z2Usa;t
Ut RUsa;t  ^RUsa;t =^ 5

2RChn;t ^z2Chn;t
Vt RChn;t  ^RChn;t =^ 6

where ^RUsa;t , ^RChn;t and ^2RUsa;t , ^2RChn;t are the estimated conditional means and variance,
respectively. In addition, let us define ruv k as the sample CCF of Ut and Vt at time lag
k. It is typically defined as follows:
p
ruv k Covuv k= Covuu 0  Covvv 0 7

where Covuu 0 and Covvv 0 are the sample variance of Ut and Vt. Covuv k is the
sample cross-covariance. That is given by: China and
X G5 stock
Covuv k T 1 Ut  U Vtk  V
 k 0; 1; 2; . . . 8
markets
The appropriate CCF-statistic proposed by Cheung and Ng (1996) is given by the
following formula:
p a
241
CCF  statistick T ruv k ! N 0; 1 9

Cheung and Ng (1996) proved that the CCF-statistic given in Equation (9) follows an
asymptotic standard normal distribution under the null hypothesis as the sample size
goes towards infinity. Consequently, the hypothesis test to determine whether
causality-in-variance or a lead-lag relationship exists between the variables at time
lag k. If the null hypothesis, H0: CCF-statistic(k) 0, cannot be rejected, there is no
evidence of causality-in-variance and vice versa.

3.2 Empirical results

3.2.1 Results of AR-EGARCH model. In order to make the model more reliable, we
compare different lag lengths and get the optimal k*, p*, q* on the basis of the methods
mentioned in the previous section. As a result, the AR(4)-EGARCH(1,1) model is chosen
for CHN, whereas the AR(1)-EGARCH(1,1) model is chosen for all other G5 countries.
Model parameters are estimated by using maximum likelihood estimation, and the test
results are presented in Table III. As focus of this paper is on volatility, the AR
estimates of the conditional means for the markets are not reported.
In this table, Q(10) and Q2(10) denote the Diebolds (1988) heteroskedasticity-corrected
Ljung-Box statistics of the standardized residuals and their squares at lag length 10,

CHN USA UK JPN GER FRA

AR(4) AR(1) AR(1) AR(1) AR(1) AR(1)
Model EGARCH(1,1) EGARCH(1,1) EGARCH(1,1) EGARCH(1,1) EGARCH(1,1) EGARCH(1,1)

! 0.1010* 0.0827* 0.0834* 0.1237* 0.0855* 0.0422

(0.0171) (0.0211) (0.0248) (0.0272) (0.0296) (0.0268)
1 0.9824* 0.9579* 0.9662* 0.9051* 0.8973* 0.9354*
(0.0069) (0.0087) (0.0079) (0.0164) (0.0207) (0.0104)
1 0.1567* 0.0758* 0.0852* 0.1817* 0.0903** 0.0340
(0.0238) (0.0235) (0.0279) (0.0333) (0.0359) (0.0316)
1 0.0183 0.1152* 0.1345* 0.1995* 0.1906* 0.2112*
(0.0135) (0.0191) (0.0194) (0.0230) (0.0250) (0.0247)
L.L. 1,727.3 1,010.6 1,041.6 1,385.1 1,259.4 1,199.7
LM(10) 9.9747 9.1953 2.2635 3.6624 5.8171 9.3267
Q(10) 13.2547 2.6439 8.4742 4.1027 8.4568 6.5076
2
Q (10) 10.6391 9.1406 2.3200 3.6905 5.7455 9.2466

Notes: * and **denote the significance level at 1 and 5 percent, respectively. Standard errors are
in parenthesis. L.L. denotes log likelihood. LM(10) is the Lagrange multiplier test statistic for the Table III.
null hypothesis that there is no ARCH effect up to order ten. Q(10) and Q2(10) are the Diebolds Estimation of the
(1988) heteroskedasticity-corrected Ljung-Box statistics with lag 10 for standardized residuals and EGARCH model using
standardized residuals squared, respectively daily stock returns
JCEFTS respectively. For each m equaling 1; 2; . . . ; 10, series Q(m) and Q2(m) statistics cannot
reject the null hypothesis of no autocorrelation at 5 percent level of significance. The
3,3 ARCH Lagrange multiplier (LM) test statistic, LM(m), can be used to test the null
hypothesis that there is no ARCH effect up to order m. LM(10) test statistic indicates that
this hypothesis cannot be rejected at the 5 percent significance level for all stock markets,
suggesting that there is no ARCH effect left in the standardized residuals[11]. These
results provide support for the specification of the selected AR-EGARCH P model.
242 In the EGARCH model, the persistence of volatility is measured by pi1 i. Numerous
existing studies demonstrate that the value of  is generally close to 1. As shown in
Table III, the coefficients of  are estimated to be 0.9824 for CHN, 0.9579 for USA, 0.9662
for UK, 0.9051 for JPN, 0.8973 for GER and 0.9354 for FRA. The fact that they are
statistically significant at the 1 percent level suggests that these markets are highly
persistent of daily volatility. The asymmetric effects of return volatility can be tested by
the hypothesis that  0. It is well known that, under the same conditions, bad news
effect on stock market is greater than good news effect[12]. As a result, the parameter  is
negative and statistically significant at the 1 percent level for G5 stock markets. This
indicates that volatility is significantly asymmetric in G5 stock markets and therefore bad
news increases volatility more than good news. However, it should be emphasized that this
coefficient of asymmetric effect is positive and statistically insignificant for CHN. This
empirical result directly conflicts with previous findings. As far as we know, no
satisfactory theoretical interpretation of this phenomenon is yet available. Perhaps the
main reason for this phenomenon is that Chinas stock market shows signs of overheating
and Chinese investors are not rational during this period. Later in this chapter, we will
study this phenomenon further based on the actual market situation.
Even when stock prices fall unexpectedly, many Chinese investors tend to hold on to
their shares because they blindly believe the stock-prices-rise myth. On the other hand,
an unexpected rise in stock prices leads to a further rise in prices and it causes market
movement to become more volatile. Furthermore, many more trading accounts had been
opened in the Shanghai and Shenzhen stock exchanges after the second half of 2006.
The total number of accounts was over 100 million in May 2007[13]. This was because
individual investors in the overheated stock market had moved their capital from banks to
the stock market in order to pursue higher potential returns. It is evident that non-rational
investment behavior exists in China. In addition, the supply of RMB increased because the
Chinese government had intervened aggressively in the foreign exchange market by
buying dollars and selling RMB in order to stabilize the exchange rate. Part of this excess
liquidity flowed into the stock market. These inflows of enormous amounts of capital
further accelerated the stock price increase. We concluded that Chinese investors were not
rational and Chinas stock market was overheating. Chinas stock market had entered a
bubble period and became over valued after the second half of 2006[14].
3.2.2 Causality test results based on the CCF approach. Since the empirical study of
this section focuses on daily data, we must take the time difference between these markets
into consideration. As far as transaction time in the same day is concerned, market hours
in China almost overlap those of Japan. Asian hours do not overlap perfectly with that
in the USA and Europe. Since significant cross-correlation at lag zero implies
contemporaneous two-way causality and there is no contemporaneous relationship
between China and G5 countries except for Japan. According to this, to give an example,
the order of time is USAt1 ) CHNt ) USAt ) CHNt1 )   . To this end, we must
use Rusa;t1 , Ruk;t1 , Rger;t1 and Rfra;t1 when testing causality-in-variance from China to
the USA or European stock markets.
 The empirical result of CCF test is shown in Table IV. Lags are measured in days, and China and
the range is 5 lags[15]. In Table IV, panel A shows test results of causality-in-variance
from China to G5 stock markets. As is clear from the table, there is strong evidence of
G5 stock
causality-in-variance going from CHN to USA, UK, GER and FRA at lag 1. All of them markets
are statistically significant at the 1 percent level. However, we do not find any evidence of
causality relationship between CHN and JPN. Panel B shows the test results of causality-
in-variance from G5 to Chinas stock market. It is interesting to see that there is no
evidence of causality-in-variance from G5 to CHN, which is consistent with the literature, 243
such as Hong et al. (2004), Han and Xiao (2005) and Nishimura (2009), among others.
In a word, strong causality-in-variance at lag 1 from CHN to USA, UK, GER and
FRA suggests that there exists short-run one-way volatility spillover effect from China
to G5 countries.

4. Volatility spillover effect using intraday high-frequency data

In the previous section, we found strong evidence of short-run one-way volatility
spillover effects from CHN to USA, UK, GER and FRA stock markets. In this section,
we adopt a new volatility measure, realized volatility (RV), to ensure the robustness of
our earlier conclusions.

4.1 Realized volatility

The initial work of Andersen and Bollerslev (1998) shows that realized volatility[16], a
new volatility measuring method based on high-frequency time-series data, is less
subject to measurement error and therefore less noisy. Suppose that a day can be
divided into n periods and we can observe n intraday stock returns during each day t,
frt1 ; rt2 ; . . . ; rtn g, realized volatility is defined as the cumulative sum of squared
them over day t, that is:
X
n
2
RVt rti ; t 1; 2; . . . ; T 10
i1

CHN ) USA CHN ) UK CHN ) JPN CHN ) GER CHN ) FRA

Panel A: Causality-in-variance test results from China to G5 stock markets

0 0.3430
1 4.4413* 2.7588* 1.7386 3.9357* 3.5278*
2 0.1796 0.1746 0.2721 0.2562 0.4513
3 0.2002 0.5419 0.5290 1.8639 0.0407
4 1.3492 2.2186** 1.5152 0.4592 0.5476
5 0.5993 1.3959 0.3337 0.8222 0.2758
USA ) CHN UK ) CHN JPN ) CHN GER ) CHN FRA ) CHN
Panel B: Causality-in-variance test results from G5 to Chinas stock market
0   0.3430  
1 0.0688 0.2160 1.6635 1.8204 0.6606
2 0.2976 0.7405 0.6983 0.0980 0.4522
3 1.3201 0.7868 0.3501 0.1952 0.6580
4 0.7146 0.8060 1.0275 0.2252 0.0440
5 0.5628 0.8789 0.7867 1.5100 0.8220

Notes: * and **denote the significance level at 1 and 5 percent, respectively. The test statistic Table IV.
shown in the table is the CCF-statistic(k) defined by Equation (9) CCF test results
JCEFTS where rti denotes the intraday stock return of the ith interval of day t, i.e.:
3,3 rti ln Pt  1 i=n  ln Pt  1 i  1=n 100 11

where ln Pt  1 i=n denotes the log-stock price for intraday period i on time t and
n denotes total amount of observed intraday stock returns.
The data for our empirical study consist of Shanghai Composite Index obtained from
244 the TX Investment Consulting Co., Ltd. from January 3, 2004 to December 31, 2007. The
total number of observation is 966. As clearly demonstrated by many authors, such as
Andersen et al. (2003), Barndorff-Nielsen and Shephard (2004), among others, the realized
volatility would provide a consistent estimator of the integrated volatility, a natural
definition of real volatility as the time interval goes to zero, i.e. n ! 1. However, as the
sampling frequency increases, the impact of the market microstructure noise becomes
more significant. To avoid the bias due to the market microstructure noise, we use the
realized volatility calculated from 5 min intraday stock returns (n 50)[17].
Stock markets, unlike foreign exchange markets, are not open 24 h a day. Chinas
stock market, for instance, opens at 9:30 am and closes at 11:30 am (morning session)
and opens at 13:00 and closes at 15:00 (afternoon session). It is open only for 4 h a day.
Consequently, we cannot get 5 min stock returns during overnight and lunch time
interval. Calculating the realized volatility including overnight and lunch time returns
may make the realized volatility noisy because non-trading returns are presumably
more volatile than intraday returns. On the other hand, the realized volatility may be
underestimated if we only use available intraday stock returns to calculate realized
volatility without overnight and lunch time returns. It is suggested by Hansen and
Lunde (2005) to scale the realized volatility by using the following formula:
PT
Rt  R2
RVt Pt1
T
RVtintra where 2
RVtintra RVt  rtnight 2
 rtlunch 12
t1 RVtintra

where Rt denotes daily return at time t, R denotes sample mean of daily returns and
RVtintra denotes realized volatility as the sum of squared intraday returns without
overnight and lunch time returns.
Figure 1 shows the time series of the realized volatility and daily closing price of CHN.
From this figure, we can clearly observe the volatility clustering. It is noteworthy that
stock price tend to rise rapidly and therefore market becomes much more volatile (higher

Figure 1.
Realized volatility (solid,
left scale) and daily
closing price (dashed,
right scale) of Shanghai
Composite Index for the
period between January 4,
2004 and December 28,
2007
volatility) after December 2006. More precisely, the average daily return from December China and
2006 to October 2007 is 0.4734 percent, significantly higher than 0.0482 percent during G5 stock
January 2004 to November 2006. Hence the average daily abnormal stock return reaches
0.4252 percent. We interpret this phenomenon as typical symptoms of speculative markets
bubble. In contrast, sliding stock and real estate prices marked the end of the late 1980s,
which is known as Japanese asset price bubble. During the period from January 4, 1988
to December 29, 1989, the average daily return of Nikkei 225 index is only 0.1195 percent, 245
less than 1/3 of the CHN. Accordingly, it makes sense to conclude that Chinas stock
market entered a speculative bubble period after the second half of 2006.

4.2 Volatility spillover effects in close-to-close and close-to-open stock returns

To assess the short-run volatility spillover effect from CHN to G5 stock market except for
JPN, we introduce the realized volatility of Chinas stock market (exogenous variable) into
the conditional variance equation (2) of the AR(k)-EGARCH(p, q) model, that is

X
k X
4
Rt c h Rth l Dl "t 13
h1 l1

X
p X
q
ln 2t ! i ln2ti j jztj j j ztj RVt 14
i1 j1

where RVt denotes the daily realized volatility of CHN calculated by formulas (10) and
(12)[18]. In this EGARCH specification, RVt can be interpreted as the recent volatility
shocks observed in the Chinas stock market. There is one important point that needs to be
emphasized about trading hour of these stock markets. The European and American
markets open after Chinas stock market closes in the same trading day t. The trading
activity in these markets is not concurrent completely. Thus, it makes sense to append the
time t Chinas realized volatility to this conditional variance specification.
Up to now, we have used close-to-close returns to estimate daily volatility spillover
effect. To discuss formally the issue of spillover effect from CHN to other stock
markets, we next consider the intraday effect on the conditional variance by using
close-to-open stock returns (overnight returns) of G5 rtnight and intraday realized
volatility of CHN RVtintra . More precisely, the most recent Chinas stock market
volatility shocks correspond to the intraday realized volatility derived from intraday
returns on the trading hours applied to the close-to-open return of G5 stock markets.
The model is shown as follows:

X
k X
4
rtnight c h rthnight l Dl "tnight 15
h1 l1

X
p X
q
ln 2tnight ! i ln2tinight j jztjnight j j ztjnight RVtintra
i1 j1

16

This procedure enables us to analyze the most recent volatility spillover effects from
CHN to G5 markets opening price.
JCEFTS If CHN is in fact volatile, such volatility may lead to greater volatility in G5 stock
3,3 market. Therefore, the parameter in both model (14) and model (16) are expected to be
positive. With regard to the methods for selecting the lag length, we also take a
stepwise procedure as mentioned above in section 3.1.1. Finally, as regards the data
problem of existence of non-synchronous holidays, we also eliminate the data when one
or both of them are closed.
246 4.3 Empirical results of short-run volatility spillover effects
We now turn to test model (14) and model (16) presented in the last section to explore the
issue of short-run volatility spillover effects from CHN to G5 (except for JPN) stock markets.
At first, we determine the optimum lag length based on the methods mentioned in the
previous section. As a result, for model (14), the AR(1)-EGARCH(1,2) model is chosen for
USA and the AR(1)-EGARCH(1,1) model is chosen for all other markets. Whereas, for
model (16), the AR(1)-EGARCH(1,2) model is chosen for USA, the AR(1)-EGARCH(2,1)
model is chosen for GER and the AR(1)-EGARCH(1,1) model is chosen for FRA[19].
Table V presents the test results of the volatility spillover effects from CHN to G5 stock
markets estimated from EGARCH model by using daily returns and realized volatility. We
are most interested in the parameter estimate on Chinas volatility shocks. It is positive
and statistically significant for all stock markets. To put it concretely, USA, UK and GER
are 0.0057, 0.0047 and 0.0059, respectively, and statistically significant at the 1 percent
level, whereas FRA is 0.0038 and is statistically significant at the 5 percent level. As is
clear from the table, the Q(10) and Q2(10) test statistics indicate that the null hypothesis of
no autocorrelation up to order 10 cannot be rejected even at 10 percent level of significance
for all markets. In addition, LM(10) test statistics shows that the null hypothesis cannot be
rejected at the 10 percent significance level. This is suggesting that there is no ARCH
effect left up to order ten in the standardized residuals.
The results of estimating the volatility spillover effects on the close-to-open stock returns
of G5 markets from CHN are shown in Table VI. Comparing these estimated spillover
effects in the volatility of the close-to-open returns with results of using close-to-close

From CHN to USA From CHN to UK From CHN to GER From CHN to FRA
Model AR(1) EGARCH(1,2) AR(1) EGARCH(1,1) AR(1) EGARCH(1,1) AR(1) EGARCH(1,1)

! 0.0343* (0.0131) 0.1052* (0.0287) 0.0596* (0.0221) 0.0553** (0.0270)

1 0.9751* (0.0041) 0.9679* (0.0071) 0.9434* (0.0114) 0.9503* (0.0091)
1 0.3383* (0.0735) 0.0926* (0.0303) 0.0409 (0.0258) 0.0378 (0.0293)
2 0.3384* (0.0733)   
1 0.2252* (0.0431) 0.1312* (0.0204) 0.1461* (0.0208) 0.1703* (0.0239)
2 0.1069** (0.0432)   
0.0057* (0.0007) 0.0047* (0.0017) 0.0059* (0.0014) 0.0038** (0.0017)
L.L. 943.17 998.87 1,227.56 1,176.42
Table V. LM(10) 8.2795 3.3733 9.2479 11.4226
Volatility spillover Q(10) 2.9348 3.5170 7.2409 5.1079
effects estimated from Q2(10) 9.1448 3.0378 8.4094 10.949
the EGARCH model
using daily stock returns Notes: * and **denote the significance level at 1 and 5 percent, respectively. Standard errors are
of the USA, UK, GER in parenthesis. L.L. denotes log likelihood. LM(10) is the Lagrange multiplier test statistic for the
and FRA markets and null hypothesis that there is no ARCH effect up to order ten. Q(10) and Q2(10) are the Diebolds
daily realized volatility (1988) heteroskedasticity-corrected Ljung-Box statistics with lag 10 for standardized residuals and
of CHN standardized residuals squared, respectively
 From CHN to USA From CHN to GER From CHN to FRA China and
Model AR(1) EGARCH(1,2) AR(1) EGARCH(2,1) AR(1) EGARCH(1,1) G5 stock
! 11.1010* (0.0915) 0.3957* (0.0676) 0.2722* (0.0459)
markets
1 0.9318* (0.0060) 0.0660* (0.0238) 0.9243* (0.0358)
2 0.4739* (0.0426) 0.8429* (0.0268) 
1 0.5146* (0.0434) 0.2038* (0.0351) 0.1690* (0.0358)
2 247
1 0.8934* (0.0426) 0.0792* (0.0228) 0.1298* (0.0250)
2 0.8615* (0.0466)
0.1102* (0.0058) 0.0165* (0.0046) 0.0134* (0.0035)
L.L. 1,157.51 239.38 602.04
LM(10) 1.1035 12.0328 8.2028 Table VI.
Q (10) 5.8926 5.6054 4.0816 Volatility spillover
Q2 (10) 1.1258 11.8855 8.4423 effects estimated from
the EGARCH model
Notes: *denotes the significance level at 1 percent. Standard errors are in parenthesis. L.L. using close-to-open stock
denotes log likelihood. LM (10) is the Lagrange multiplier test statistic for the null hypothesis that returns of the USA,
there is no ARCH effect up to order ten. Q(10) and Q2(10) are the Diebolds (1988) GER, FRA markets and
heteroskedasticity-corrected Ljung-Box statistics with lag 10 for standardized residuals and intraday realized
standardized residuals squared, respectively volatility of CHN

returns reported in Table V, we find similar results, i.e. intraday realized volatility of CHN
has positive influences on the close-to-open volatility in other markets. More precisely,
USA, GER and FRA are 0.1102, 0.0165 and 0.0134, respectively, and statistically significant
at the 1 percent level. It is important to emphasize that the estimated coefficients of the
parameter in Table VI are greater than those in Table V, suggesting that the most recent
volatility spillover effects on the opening price are more significant. Furthermore, Q(10),
Q2(10) and LM(10) test statistics indicate that there are no autocorrelation and ARCH effect
left. These results empirically support the specification of the selected model.
In brief, we find clear evidence that Chinas daily and intraday realized volatility
have a significant positive influence on the volatility of the close-to-close and close-to-
open stock returns in G5 markets. This evidence reinforces the assumption of the
existence of volatility spillover effects from China to G5 stock markets[20].

5. Conclusions and implications

This paper mainly studies the existence of volatility spillover effects between China
and G5 stock markets by using the EGARCH model, the CCF approach and realized
volatility. The empirical results reveal some intriguing characteristics of these markets.
We find strong evidence of short-run one-way volatility spillover effects from China to
the US, the UK, German and French stock markets. The empirical results suggest that
Chinese investors were not rational and Chinas stock market entered a speculative
bubble period after the second half of 2006.
The finding of one-way volatility spillover from small stock markets to large stock
markets apparently conflicts with previous findings mentioned in section 1. In the
following paragraphs, we try to explain this international stock market co-movement
paradox. As clearly demonstrated by Ross (1989), return volatility also provides a useful
signal of information flow, in other words, the direction of volatility also provides a
useful signal on information flow. In view of this, the empirical evidence in this paper
suggests that uncertainty in Chinas stock price might have had significant effects on G5
JCEFTS countries whereas the information flow from G5 countries to China could be hindered
seriously. Economic progress and general investment conditions in China are now
3,3 viewed as a barometer of world growth and investor confidence[21]. Stock prices are
generally forward looking and regarded as a leading indicator of future economic
activity. Chinas stock market is associated with the development of the Chinese economy
and the performance of China-related companies. The paradox is caused by the non-
liberalization of trade and investor structure in Chinas stock market.
248 Although Chinas accession to the World Trade Organization on December 11, 2001
has brought rapid and broad deregulation and liberalization to the country, there is still
severe regulation of the Chinese stock market. Up to now, the Chinese government has
controlled the foreign capital inflow and outflow by separating foreign and domestic
investors[22]. Only foreign investors with Qualified Foreign Institutional Investors (QFII)
quotas are allowed to trade A-share stock. By the end of 2007, the China Securities
Regulatory Commission had approved QFII licenses for 52 overseas financial
institutions, which received a combined quota of 9.995 billion US$ from the State
Administration of Foreign Exchange (SAFE). On December 31, 2007, the A-share
negotiable market capitalization of the Shanghai and Shenzhen stock exchanges were
6,435.22 billion and 2,853.22 billion RMB, respectively, and the B-share negotiable market
capitalization of Shanghai and Shenzhen stock exchanges were 132.24 billion and 117.91
billion RMB, respectively[23]. Hence, the non-tradable shares on the total B-share market
and total QFII quota only accounted for approximately 2.69 and 0.79 percent of the whole
market, respectively[24]. In short, the presence of foreign investors is too low to influence
Chinas stock market. Stock price seldom reflects any available information from foreign
investors.
Since the commencement of Chinas stock market, domestic individual investors have
been the main participants[25]. As mentioned earlier, domestic individual investors account
for 99 percent of total stock accounts. Even if many individual accounts are actually
controlled by institutional investors, the number of institutions is still tiny compared with
the number of individuals. Moreover, in 2007, the number of trading accounts, the total
number of shares traded and the total turnover in the A-share market were 58.01 million,
7,129.83 billion and 90,870.24 billion RMB, respectively. The actual data for individual
investors was 57.89 million (99.79 percent), 6,462.29 billion (90.64 percent) and 78,819.59
billion RMB (86.74 percent). In general individual investors face a distinct disadvantage,
compared with their institutional counterparts, in the volume of available and relevant
information they can access. Furthermore, individual investors are not as sensitive as
institutional investors to external information. In addition, since only a few domestic
investors with Qualified Domestic Institutional Investors (QDII) quotas are allowed to
invest in foreign securities, the majority of Chinese investors have little interest in overseas
information and do not pay much attention to international stock market movements.
Our empirical results are important for market participants as well as policy makers.
For market participants, it is imperative that there be a better understanding of how a
domestic market relates to the global markets when constructing a diversified portfolio.
The significant volatility spillover effects between China and G5 markets do exist,
indicating the importance of sound risk management in portfolios. For policy makers, it
is important to note that a change in information transmission from global markets does
affect the whole financial system. The increased effects of external shocks on markets
are important for financial regulatory requirements, such as capital requirements for
financial institutions. Moreover, it is thought that the unbalanced investor structure is
one of the causes of high volatility in Chinas stock market. The structural reform of
the security markets and the development of high-quality institutional investors are China and
essential in order to prevent excessive volatility. G5 stock
There is a well-known policy Trilemma defined as the incompatibility of perfect capital
mobility, fixed exchange rates and domestic monetary autonomy (Rose, 2000, p. 215). So markets
far the Chinese government has maintained strict capital mobility control to secure fixed
exchange rates and national independence in monetary policy. However, as argued above,
the Chinese government is advancing the deregulation of the short term through various 249
policies such as QFII and QDII. The liberalization of capital inflow is often accompanied by
market deregulation, which could increase the globalization of financial markets and affect
the nature of relationships among stock price movements crossing markets. The paradox
of Chinas international stock market co-movement is a special phenomenon in China,
which exists together with rapid economic development and severe capital regulation. We
expect that the Chinese government will accelerate further liberalization and deregulation
in the capital market. The force of globalization can gradually increase an international
stock market co-movement relationship between China and the rest of the world.

Notes
1. The Autoregressive Conditional Heteroskedasticity (ARCH) model was proposed by
Engle (1982) and generalized (GARCH) by Bollerslev (1986). Engle et al. (1987) extended
the ARCH model further to allow conditional variance to be a determinant of the
conditional mean, which is well known as the ARCH-in-mean (ARCH-M) mode.
2. The Asian countries or regions included by Watanabe (1996) were Japan, Hong Kong,
Korea, Taiwan, Singapore, Malaysia, the Philippine, Thailand and Indonesia.
3. The data were obtained from Shanghai Stock Exchange homepage (www.sse.com.cn) and
Shenzhen Stock Exchange homepage (www.szse.cn).
4. Hamao et al. (1990) also investigated pricing relations across markets using substitution
variable which is most recent volatility surprise as well as the method of dropping out all
the data for holidays. They report that qualitatively similar spillover effects were observed.
5. Diebolds (1988) heteroskedasticity-corrected Ljung-Box statistics is as follows:
m 
X  2
^4
^ k
Qm TT 2
k1
^4 y2 k T  k

where T denotes sample size, ^4 denotes squared sample variance, y2 k denotes lag-k
sample covariance of y1  y2 ; y2  y2 ; . . . ; yT  y2 and
^k denotes sample
autocorrelation coefficient at lag k. See also Diebold and Lopez (1995), Watanabe (2000).
6. We arbitrarily set the lag length 1; 2; . . . ; 15, and then determine the appropriate lag length
by minimizing one of the SBIC.
7. As argued by Cheung and Ng (1996), Hong (2001), Hamori (2003), causality-in-variance
is directly related to volatility spillover.
8. Since some literatures have reported that the asymmetry and persistence of volatility is
existed in the Shanghai Composite Index, such as Men et al. (2007), we employ the
EGARCH model to capture the ARCH effects precisely.
9. The day-of-the week effect in stock market is understood as significantly different stock
returns in different days of a week. Feng (2000) studied the effect in Chinas stock market
using daily data of Shanghai Composite Index and Shenzhen Component Index. He found
that there was significant negative Tuesday effect and significant positive Friday effect
in Shanghai stock market.
JCEFTS 10. For details regarding theoretical explanation of CCF approach see also Hong (2001) and
Hamori (2003).
3,3
11. We also carry out the LM test on the simple AR(k) model (1), i.e. without considering
GARCH components. The result shows that LM(10) test statistics are significant at
1 percent level in all markets. This suggests that the return series of China and G5
countries stock markets have high-order ARCH effect. The result is as follows:
250 CHN USA UK JPN GER FRA

LM(10) 36.14* 68.59* 144.27* 32.74* 36.94* 80.82*

Note: *denotes the significance level at 1 percent

12. To see the reason of volatilitys asymmetry, refer to Campbell and Hentschel (1992). They
demonstrated that leverage effect or feedback effect could explain the phenomenon.
13. In recent China, more and more people have started to buy stock, and individual
investors account for 99 percent of total stock accounts. We call this phenomenon Quan
Min Chao Gu (all people invest in the stock market) in Chinese.
14. This bubble phenomenon can be observed from two years of historical Shanghai
Stock Exchange data from the beginning of 2006 to the end of 2007. At the end of 2007,
the total market capitalization of the Shanghai Stock Exchange was 26,983.89 billion
RMB that was 11.7 times as large as 2,309.6 billion RMB at the beginning of 2006. The
Shanghai Composite Index hit 5,261.56 points at the end of 2007 from 1,242.77 points at
the beginning of 2006, up 423.37 percent approximately. Furthermore, it was abnormal
that the average P/E ratio should stand at 59.24 times in December 2007. The data were
obtained from the Shanghai Stock Exchange homepage (www.sse.com.cn).
15. We also examined CCF test up to lag 20 (one month), and there was no evidence of
causality-in-variance between these markets.
16. For details regarding theoretical explanation of realized volatility see also Andersen et al.
(2003), Barndorff-Nielsen and Shephard (2004). Barndorff-Nielsen and Shephard (2004)
refer to realized volatility to realized variance.
17. The 5 min frequency can be considered as the highest frequency at which the effects of
market microstructure noise are not too distorting. See also Andersen et al. (2001) and
Koopman et al. (2005).
18. To examine the stationarity of the realized volatility series before estimating the model, we
also perform the ADF test as well as section 2. As a result, both of RVt and RVt(intra) are
stationary series, and therefore we introduce these variables into conditional variance
equation directly.

RVt RVtintra

C 9.1100* 9.0662*
C and TR 10.1458* 10.1061*

Note: *denotes the significance level at 1 percent

19. FTSE 100 opening price is the same as the previous days closing price in our data set,
and therefore we have no choice but do abandon testing spillover effect among CHN
and UK in this close-to-open stock return analysis.
 20. We also investigated the effect of estimating these models using realized volatility in China and
logarithmic form, lnRVt, and standard deviation form, (RVt)1/2, instead of simple
(variance form) realized volatility RVt. As a result, parameter estimate on the volatility G5 stock
spillover effect is positive and statistically significant as well. The qualitative results markets
turned out to be very similar and summarized as follows:

Close-to-close return volatility Closed-to-open return volatility

USA UK GER FRA USA GER FRA 251
ln RVt 0.0204* 0.0158* 0.0179* 0.0127** 0.2958* 0.0388* 0.0423*
(0.0032) (0.0061) (0.0052) (0.0053) (0.0228) (0.0104) (0.0108)
1=2
RVt 0.0248* 0.0201* 0.0234* 0.0160** 0.4157* 0.0605* 0.0562*
(0.0031) (0.0072) (0.0061) (0.0067) (0.0295) (0.0161) (0.0141)

Notes: * and **denote the significance level at 1 and 5 percent, respectively

21. China snuffle sends shivers worldwide by Mark Konyn, Financial Times, March 26, 2007.
22. A-share stock only for domestic investors buying with RMB; Shanghai and Shenzhen
B-share stocks only for foreign investors purchasing with US$ and HK$, respectively.
After February 19, 2001, B-share stock was also opened to domestic investors.
23. The data were obtained from Shanghai Stock Exchange homepage (www.sse.com.cn) and
Shenzhen Stock Exchange homepage (www.szse.cn).
24. These data were calculated using exchange rate of US$1 7.3046 RMB on December
28, 2007. Exchange rate was obtained from SAFE homepage (www.safe.gov.cn/).
25. For details regarding investor structure of Chinas stock market see also Tan (2006,
chapter 7.2.4).

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About the authors

Yusaku Nishimura is a PhD candidate at University of International Business and Economics in
Peoples Republic of China. His research interests include financial and capital markets, financial
risk management and financial time-series analysis and econometrics. He is a member of the
Japan Society of Monetary Economics, Society for the Economic Studies of Securities and
Japanese Research Association for Chinese Economy.
Ming Men is a Professor of Finance at the University of International Business and Economics,
currently the Director of Center for Financial Markets and Investment in China, an adviser of
Global Business and Economic Development Society, and a specialist of the Association of China
Enterprises Competitiveness. He earned his MBA from the University of Illinois at Urbana-
Champaign and PhD from UIBE. He served as the Associate Dean at Shihezi University during the
period from 2008 to 2010. He is a Fulbright scholar. He has been undertaking a number of research
projects, including National Social Science Foundation and Beijing Education Bureau important
projects. He has written a number of textbooks on financial derivatives theories and application,
advanced investment and financial engineering. In addition, he has published several dozens of
papers on financial innovation, exchange rate volatilities, emerging markets and financial model
analysis in international journals like Asia-Pacific Economic Literature, Global Business and
Finance Review, and a number of Chinese academic journals. Besides teaching, he also provides
consulting services to Chinese government departments and industrial corporations in the fields of
international finance, strategic management, financial risk management and project investment.
Ming Men is the corresponding author and can be contacted at: ming_men@yahoo.com

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