Econometric analysis of the risk transfer in capital markets. The case of China

Econometric analysis of the risk transfer in capital markets. The case of China

Magdalena Osińska, Marcin Fałdziński, Tomasz Zdanowicz


Keywords: financial markets, expected shortfall, Granger causality, risk transfer, value at risk


Summary: The problem of risk transferring is well known in empirical finance. Agents often try to transmit their risk from one market to another when the limit values of their potential losses are being approached or exceeded. The purpose of the paper is to find out whether the Chinese financial markets in the last decade were a source or the result of the risk. Much attention has been paid to the period of the last financial crisis. One of the important findings is that the risk, generated locally, is transmitted via sequent markets to the absorbing one. This process may last up to 40 trading days. To detect whether the risk was transmitted between two markets or not, the Granger causality tests have been applied in connection with the causality in variance as well as causality in risk. Such empirical characteristics as the value at risk and expected shortfall are considered.



Artzner, P., Delbaen, F., Eber, J. M., Heath, D., Coherent Measures of Risk, “Mathematical Finance”, 9, pp. 203-228, 1998.

Allen, F., Gale, D., Financial Contagion, “The Journal of Political Economy”, 108(1), pp. 1-33, 2000.

Baba, Y., Engle, D.F., Kraft, D. F., Kroner, K. F.,Multivariate Simultaneous Generalized ARCH, mimeo, Department of Economics, University of California, San Diego,, 1990.

Caporale, G. M., Pittis, N., Spagnolo, N., Volatility Transmission and Financial Crises, “Centre for Monetary and Financial Economics”. South Bank University, London 2002a.

Caporale, G. M., Pittis, N., Spagnolo,N.,Testing for Causality-in-variance: An Application to the East Asian Markets, “International Journal of Finance and Economics”, 7(3), pp. 235-245, 2002b.

Chen, K.C., Li, G., Wu, L., Price Discovery for Segmented US-Listed Chinese Stocks: Location or Market Quality?,“Journal of Business Finance and Accounting”, Vol. 37, pp. 242-269, 2010.

Cheung, Y. V., Ng, L. K., A Causality-in-variance Test and Its Application to Financial Market Prices, “Journal of Econometrics”, 72(1-2), pp. 33-48, 1996.

Dungey, M., Fry, R., Gonzales-Hemorsillo, B., Martin, V., Empirical Modelling of Contagion: A Review of Methodologies, IMF Working Paper, No.WP/04/78, 2003.

Granger, C. W. J., Investigating Causal Relations by Econometric Models and Cross-spectral Methods, “Econometrica”, 37(3), pp. 424-438, 1969.

Hafner, C. M, Herwatz, H., Testing for Causality in Variance Using Multivariate GARCH Models, Kiel University D.P., 2004.

Hong, Y., A Test for Volatility Spillover with Applications to Exchange Rates, “Journal of Econometrics”, 103(1-2), pp. 183-224, 2001.

Hong, Y., Liu, Y., Wang, S., Granger Causality in Risk and Detection of Extreme Risk Spillover between Financial Markets, “Journal of Econometrics”, 150(2), pp. 271-287, 2009.

Lee, J., Lee H., Testing for Risk Spillover between Stock Market and Foreign Exchange Market in Korea,“Journal of Economic Research”, 14, pp. 329-340, 2009.

Liao, X., Qi, G.,Analysis and Comparison of ARCH Effects for Shanghai Composite Index and NYSE Composite Index,“International Journal of Business and Management”, 3(12), pp. 20-24, 2008.

Lim, K-P.,Habibullah, M. S., Hinich, M. J.,The Weak-form Efficiency of Chinese Stock Markets. Thin Trading, Nonlinearity and Episodic Serial Dependencies,“Journal of Emerging Market Finance”,8(2), pp. 133-163, 2009.

Malkiel, B. G., Taylor, P. A., From Wall Street to the Great Wall. Norton & Company, 2009.

Neftci, S. N., Menager-Xu, M. Y., China’s Financial Markets. Elsevier Academic Press, 2006.

Osinska, M., Econometric Analysis of Causal Relationships (in Polish).Nicolaus Copernicus University of Torun, 2008.

Osinska, M.,Zdanowicz, T., (2011), What Drives Chinese Financial Markets?[in:] Milo, W., Szafrański, G., Wdowiński, P. (eds.) Financial Markets. Principles of Modelling, Forecasting and Decision-Making,FindEcon Monograph Series: Advances in Financial Market Analysis, 9, Lodz University Press, forthcoming. Pericoli, M., Sbraccia, M., A Primer on Financial Contagion, “Journal of Economic Surveys”, Vol.17, pp. 571-608, 2001.

Pierce, D. A.,Haugh, L. D., Causality in Temporal Systems, “Journal of Econometrics”, 5(3), pp. 265-293, 1977.

Preliminary Report of China’s Going Global Strategy,, 2009

Wentao, T., China’s Stock Market [in:]Neftci, S. N., Menager-Xu, M.Y. (eds.),China’s Financial Markets. Elsevier Academic Press.,2006.

Wang, K., Lee, Y., (2009), The Stock Market Spillover Channels in the 1997 Asian Financial Crisis, “International Research Journal of Finance and Economics”, Vol. 26, pp. 105-133. Weber, E., Volatility and Causality in Asia Pacific Financial Markets, “Applied Financial Economics”, Vol. 20, pp. 1269-1292, 2010.



Download PDF

Read 1237 times Last modified on Saturday, 01 March 2014 15:54