Research on Spillover Effects in Financial Risk

The research on spillover effect in financial markets is frontier theory and technology. The global financial crisis of 2007-2009 affects the stock markets deeply. But, the economic consequences are different among some cross-markets. As an emerging high-speed growth securities market established in 1990, the Chinese securities market has developed significantly. Again in the current international financial crisis, it is being closely watched that how deeply China’s market affected by the financial crisis and the role making a major contribution to stabilizing the global financial situation. Both GARCH and Granger causality test are used to measure the volatility spillover in the existent literatures. However, in case of the correlations of some markets are not linear relationship, Copula functions have recently become popular. In this paper, we have tested for spillover effects in financial risk between the Shanghai market and the other main stock markets. We use the kernel smoothing function to estimate the marginal density distribution, and use the Copula functions to estimate the joint distribution of the marginal distribution. Furthermore, we use the bivariate Archimedean copula to estimate the symmetrical and asymmetrical distribution. The main findings are that Shanghai market is not affected by New York market significantly in the financial crisis, it can not exert on significant influence to New York market as well. The similar degree of market efficiency, the similar attitude about considering on risk and earnings are more important on leading to the spillover effect in stock markets than the real economic link between Shanghai market and New York market.