Dynamic linkages between the China and ASEAN stock markets: Asian financial crisis and the 2007 subprime crisis

Understanding the transmission mechanism among the stock markets is important and of great interests both for market investors and market regulators. This paper takes alternative way to investigate the relationship between the China and the ASEAN stock markets during the Asian financial crisis and the Subprime crisis. In doing so, a vector-autoregressive multivariate conditional volatility model that account for asymmetric volatility effect is used to model the mean and volatility process of the Chinese and ASEAN stocks markets. The results indicate spillover effect in both of Chinese stock market on ASEAN and variance between Chinese and ASEAN stock markets and the volatility transmission mechanism is asymmetric. i.e., negative innovations in one market increase volatility in another market considerably more than positive innovation. We also find higher pair-wise correlation coefficients during the recent crisis period. Our finding suggest that Chinese market and ASEAN market are more integrated and they are not react not only to local news but also to news originating in the other markets, especially when the news is adverse