Volatility and correlation dynamics of the mainland Chinese and Hong Kong stock markets: Evidence from the A-, B-, H- And red chip markets

This article examines the volatility dynamics of the mainland Chinese stock markets (Shanghai Aand Bshares, Shenzhen Aand Bshares, Hshares, and red chips) by employing the daily returns data from 1993 to 2012 and a multivariate volatility framework that incorporates the features of asymmetries, persistence, and timevarying correlations, which are typically observed in stock markets of developed economies. Our results indicate that, unlike the Shenzhen and Shanghai Ashare markets, the Bshare, Hshare and red chip markets do not exhibit significant asymmetric volatility (leverage effect). Furthermore, return volatility in the Ashare markets is relatively more volatile than the others before 1997 and becomes more stable afterward. In addition, there is strong evidence of volatility persistence in all the markets, and this finding is robust to changes in model specification. The Chinese stock markets apparently share a common degree of persistence (fractional integration) in volatility. Moreover, the conditional correlations are significantly timevarying and are strengthening over time, especially after 2002. These findings have important implications for hedging and portfolio management and diversification.