Date of Award
2024
Document Type
Thesis - ECU Access Only
Publisher
Edith Cowan University
Degree Name
Doctor of Philosophy
School
School of Business and Law
First Supervisor
Zhaoyong Zhang
Abstract
China’s significant economic growth and increased integration with the rest of the world have raised global interest in Chinese markets but it has also raised concerns about the Chinese financial system. In recent years, the Chinese government has implemented measures to internationalize the Chinese Renminbi (RMB) and deepened domestic financial market reform, yet the RMB is still not fully convertible. Further promotion of the RMB internationalization has the potential to create more volatility in China’s financial system. Therefore, it is essential to understand the dynamics and the efficiency of the Chinese financial market. Through decades of market-oriented reforms and opening-up policies, the Chinese financial markets, particularly the foreign exchange and stock markets, may have witnessed improvements in information processing, resource allocation, and operational mechanisms, leading to heightened market flexibility. However, challenges such as imperfect financial market structure, constraints on the capital market, and restrictions on RMB convertibility may make the market more susceptible to external shocks and elevate risk levels. In this context, the thesis aims to empirically examine the volatility dynamics of the RMB exchange rate and the stock indices, the spillover effects between the two assets, and the impact of public news arrival on the return volatility and correlations.
Based on the price series and news series from 2010 to 2022, the univariate EGARCH model is employed to examine the volatility dynamics of the RMB exchange rate and stock index return respectively. The impact of public news arrival on conditional volatility is assessed by incorporating news variables in the conditional variance equation according to the Mixture Distribution Hypothesis. The DBEKK-MGARCH model is used to analyse the spillover effects between the RMB exchange rate and stock indices return, and the DVECM-GARCH model is also employed for the robustness test. Furthermore, the study examines the impact of public news arrival on the conditional correlations extracted from the multivariate GARCH models. Various news types, including macroeconomic news, RMB exchange rate news, and stock index news, are adopted to cover both the fundamental and market-specific information while addressing the heterogeneity derived from the news contents.
Findings from the RMB exchange rate suggest that the volatility persistence is considerably high. A significant asymmetric effect is observed in return volatility. The macroeconomic and RMB exchange rate news positively affect RMB exchange rate volatility. The inclusion of news variables in the conditional variance equation reduces volatility persistence. The 8.11 RMB exchange rate regime reform positively influences the RMB return and volatility. The COVID-19 pandemic negatively affects the RMB return while enlarging the return volatility. Further investigation finds that the RMB reform weakens the relationship between RMB exchange news and conditional volatility while the pandemic strengthens the relationship. In the Chinese stock market, high volatility persistence and asymmetric effects are also detected. Macroeconomic news negatively influences stock index volatility. Stock index news reveals an insignificant effect on return volatility. The inclusion of news variables has a negligible effect on volatility persistence. The RMB reform negatively impacts the index return volatility, whereas the COVID-19 pandemic has a positive effect on index return. However, both the RMB reform and the pandemic do not affect the relationship between news and index return volatility. The relationship between the RMB exchange rate and the stock indices indicates that mean and volatility spillover effects unidirectionally flow from the stock indices to the RMB return. Reverse spillover effects from the RMB return are only detected in several sectoral indices. Public news arrivals typically have negative impacts on the conditional correlation of the RMB exchange rate and stock indices. The stock index news is significant in more cases than the macroeconomic news and RMB exchange rate news.
Although the autocorrelation in the RMB return or stock index return violates the requirement of the Weak-form Efficient Market Hypothesis, the empirical results argue that the RMB exchange rate and stock indices are sensitive to public news arrival. The results also support the improvement in market flexibility and liquidity. These findings imply that the Chinese financial market has made progress in information processing, resource allocation, and operational mechanisms. However, from the differences in the market responses to information and the unidirectional spillover effects, it can be inferred that the efficiency advancements are uneven. The study highlights the importance of further improving market efficiency. Meanwhile, the study reminds the market participants to be cautious about the high volatility and asymmetric effects in the Chinese financial market, and properly incorporate the impact of public information arrival into decision-making. The findings of this study can enrich the relevant research realm and bring inspiration to investors and policymakers.
DOI
10.25958/7350-2c31
Access Note
Access to this thesis is embargoed until 26th November 2026
Recommended Citation
Zhang, F. (2024). Market efficiency and volatility dynamics in China's financial markets. Edith Cowan University. https://doi.org/10.25958/7350-2c31