Conditional heteroscedasticity with leverage effect in stock returns: Evidence from the Chinese stock market

In recent years the Chinese stock market has experienced an astonishing growth and unprecedented development, but is also viewed as one of the most volatile markets, which has been called by many observers a “casino”. This study intends to examine the presence of heteroskedasticity and the leverage effect in the Chinese stock markets, and to capture the dynamics of conditional correlation between returns of China's stock markets and those of the U.S. in a bivariate VC-MGARCH framework. The results show that the leverage effect is significant in these markets during the sample period in 2000–2013, and the conditional correlation between mainland China's and the U.S. stock markets is quite low and highly volatile. The Chinese stock markets are found to be highly regimes persistent. These findings have important implication for investors seeking opportunity of portfolio diversification.