Volatility Spillovers of Stock Markets between China and the Countries along the Belt and Road

ABSTRACT

This article intensively studies the stock market volatility spillover effects between China and the countries along the Belt and Road (B&R) based on the covered selection of Morgan Stanley Capital International Inc (MSCI) index by using multiplicative error model to measure stock market volatility with daily price range. The results show that during the whole sample period, there are bilateral linkages of volatility between the stock markets of China and all of B&R countries. Most of B&R and China’s markets are sensitive to positive news but the asymmetry is trivial. Financial crisis intensified the volatility spillover effects across countries while the markets’ volatilities tend to be influenced by the negative shocks from foreign markets. The B&R markets as risk absorbers exhibit significant sensitivities to the negative news from Chinese market during the crisis period.

KEY WORDS:

• asymmetry
• financial crisis
• stock market
• the Belt and Road
• volatility spillover effect

JEL CLASSIFICATION:

• G15
• F36
• C58

Notes

1. In the remainder of this article, the B&R countries denote the courtiers covered by the BRI.

2. In the previous literature employing MEM models, various distributional assumptions on the error term have been entertained. According to Engle (2002), we assume that the error term follows the Gamma distribution. For ${\in }_t\sim Gamma(\lambda ,\gamma )$, we have $E({\in }_t)=\frac{\lambda }{\gamma }$, $var({\in }_t)=\frac{\lambda }{{\gamma }^2}$. Due to $E({\in }_t|F_{t-1})=1$, we have ${\in }_t\sim Gamma(\lambda ,\lambda )$.

Additional information

Funding

This work was supported by the National Science Foundation of China [grant number 71101118], [grant number 71771187] and the Program for New Century Excellent Talents in University [grant number NCET-13-0961] in China.