The impact of China's stock market reforms on its international stock market linkages

This paper investigates how China's stock market reforms have affected the stock market linkages between China and Korea, Japan and the US respectively. We firstly use a 4 × 4 asymmetric GARCH-BEKK model and a series of likelihood ratio tests to uncover China's regional and global linkages between 1992 and 2010 and during three sub-periods representing the stages of the Chinese reforms. The results show that Chinese stock market is linked to these overseas markets and the reforms permit spillovers to these markets from China. The subsequent regression analyses of the time-varying conditional correlations, in the presence of growing economic integration, exchange rate risk and financial turbulence, further indicate that the interdependences between China and the regional markets increase due to the implementation of liberalisation policies. However, the correlation between China and the global market remains weak even though this correlation responds positively to the institutional reforms on China's stock market additionally.

► We model market interactions among China, Korea, Japan and the US through a 4 × 4 GARCH. ► China reacts passively to overseas shocks prior to imposition of stock price limits. ► Reforms limit noise-induced correlations, leading to China's isolation over 1997–2003. ► Liberalisation has facilitated volatility spillovers to and from China since 2003. ► Linkages between China and developed markets respond to ownership reform additionally.