The effect of China's stock market reforms on market interdependence

This paper investigates stock market interdependence between China, Korea, Japan and the US with particular attention to the impact of the Chinese reforms within a 4x4 asymmetric GARCH-BEKК framework. We find a bi-directional market linkage between China and the US and uni-directional linkages from China to Korea and Japan during 1992-2010. However, the market interdependence between China and the US remains weak while China is increasingly integrated with the regional markets. The five major reform policies under study are significant in altering the extent of the market interdependence, but it is trade links as well as the reforms that strengthen the regional market integration during 2003-2010 and stock market volatility that increases the market interdependence between China and the US during 2008-2010 The weak market integration with the US limits the destabilising effect on China although negative shock propagation was found from the US to China during the latest financial crises.