Empirical studies on the volatility of China stock market

逢 甲 大 學

金融博士學位學程

博士論文

中國股市波動之實證研究

Empirical studies on the volatility of China stock market

指導教授：吳仰哲教授

: 翁慈青 教授

研 究 生 ：王氏香江

中華民國一百一十年一月

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ACKNOWLEDGEMENTS

I would like to express my sincere thanks to the Chair of the Ph.D. Finance

program, the Director of Finance College, Feng Chia University’s administration

for creating all favorable conditions for me to complete this thesis. Most important,

I would like to thanks both Professors. Yang-Che Wu and Tzu-Ching Weng guided

enthusiastically me to carry out my thesis step by step. During my studying

process in Taiwan, I highly appreciate their contributions for time, subsidies, and

inspiration ideas to me. They taught me a lot of knowledge in the finance and

accounting fields. Especially, they have always encouraged and supported me to

perform the Ph.D. Finance program. Their successes and passion for researching

inspired me to complete my thesis.

I appreciate Professor Richard Lu, Li-Jiun Chen, Nathan Liu, Thomas Chinan

Chiang, Wei-Feng Hung, Yi-Ting Hsieh, Shin-Heng Michelle Chu. Their classes

provided me with a lot of specialized knowledge about econometrics and finance.

Professor. Richard Lu who always welcomes all students if we need any helps. I

am very impressed with his outdoor trips for all Ph.D. students to give memorable

memories in Taiwan country.

I would like to express my sincere thanks to my classmate, namely, Huu Manh

Nguyen for his help and collaborative assistance in the thesis. During two

academic years, he taught me basic knowledge in the financial field that I have

ever not known because before my studies focus mainly on the accounting field.

In our teamwork, he always enthusiastically guided me to how present in my

studies, my presentations in the best way. With his bits of help, I obtain more

knowledge, better skills in my research.

For the MATLAB code, Uyen Kim Nguyen who graduated Master IT program

a Feng Chia University has significant contributions to my empirical results. She

helps me how to write code in MATLAB software to solve the ICSS algorithm in

the methodology sector of the first study. I appreciate her time and her effort in

my thesis.

I would like to thank Finance College’s assistant who was ready to help with

any works related to us in Taiwan and arranged this thesis defense. Because of

Empirical studies on the volatility of China stock market

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FCU e-Theses & Dissertations (2021)

language limits, I cannot write exactly her name but I hope that she may get my

gratefulness.

About the final defense, I am grateful to committee members: Professor. Yang￾Che Wu, Professor. Tzu-Ching Weng, Professor. Tsang-Yao Chang, Professor. Yu￾Chih Lin and Professor. Meng-Fen Hsieh for their time, attention, and insightful

suggestions for completing this thesis.

Finally, I express all thanks to my family in Vietnam. I am so grateful for my

parents who encourage me to pursue the Ph.D. Finance program at Feng Chia

University. Especially for my mother who helps me to take care of my daughter

during the long period of the Ph.D. Finance program. I am so appreciated. Thank

you for all!

Vuong Thi Huong Giang

Feng Chia University

January 2021

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ABSTRACT

The volatility of the stock market returns needs to be carefully considered

because it relates closely to the degree of risking contagion between the equity

markets and the adjustment on the capital structure of listed firms.

In the macro aspect, the first study examines the bidirectional volatility

spillovers between the US and China stock markets in the post-2000 period. We

employ a variant model of EGARCH (1,1) with controlling the excessive volatility

points that are detected by the ICSS algorithm. Our results imply the barriers in the

bilateral US-China relationship and foreign investment’s restrictions in China’s

financial market have distinctly influenced the bidirectional volatility infections.

Most crucially, we indicate that the global financial crisis exposed the majority

volatility contagion from the US to China stock market while the Covid-19

pandemic strongly promoted the volatility infection from China to the US equity

market in March 2020.

In a micro aspect, an essential issue of listed firms is adjusting their market

leverages as the volatility of the stock market returnsincreases. Our paper examines

this concern on the biggest stock exchange of China market covering 2008 to 2018

in a panel model. The volatility of Chinese stock market returns immediately has

positive impacts on both total market leverage and short-term market leverage, but

a negative influence on the long-term market leverage of Chinese listed firms. We

indicate that in this situation, Chinese listed firms adjust their debt structure by

employing more bank debts and cutting trade credit. Finally, we present robust

evidence that the proportion of bank debts in total debts visibly increases while the

ratio of trade credit in total debts distinctly reduces. Furthermore, we implement

robust tests regarding potential issues such as sample selection, model selection,

endogenous factors, and apply quantile regression (QR) to enhance the robustness

of our empirical results.

Keywords: US stock market, China stock market; Bidirectional volatility spillovers;

ICSS algorithm; EGARCH (1,1) model; Capital structure; Panel model.

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CONTENTS

ACKNOWLEDGEMENTS..................................................................................i

ABSTRACT.........................................................................................................iii

CONTENTS.........................................................................................................iv

LIST OF FIGURES ...........................................................................................vii

LIST OF TABLES.............................................................................................viii

STUDY I: ..............................................................................................................1

THE BIDIRECTIONAL VOLATILITY SPILLOVERS BETWEEN THE US

AND CHINA STOCK MARKETS.....................................................................1

1.1. Introduction...................................................................................................1

1.1.1. Research background...............................................................................1

1.1.2. Research motivations and Research contributions..................................4

1.1.3. Research structure....................................................................................6

1.2. Literature review...........................................................................................6

1.3. Sample, Methodology and Empirical models.............................................9

1.3.1. Sample .....................................................................................................9

1.3.2. ICSS algorithm to detect structural breakpoints in the variance of volatility

source’s returns..................................................................................................9

1.3.3. Modeling the bidirectional volatility spillovers between the US and China

stock markets................................................................................................... 11

1.4. Analyzing empirical results on the bidirectional volatility spillovers

between the US and China stock markets .......................................................13

1.4.1. Basic analysis.........................................................................................13

1.4.2. Empirical results on the volatility spillovers from the US to China stock

market ..............................................................................................................15

1.4.2.1. Modeling the volatility of Shanghai Composite’s returns by using

structural breakpoints in the variance of US stock market returns .............15

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1.4.2.2. Modeling the volatility of Shenzhen Composite’s returns by using

structural breakpoints in the variance of US stock market returns .............17

1.4.2.3. Modeling the volatility of Chinese stock market returns by using the

variance of US stock market returns...........................................................18

1.4.3. Empirical results on the volatility spillovers from the China to US stock

market ..............................................................................................................19

1.4.3.1. Modeling the volatility of S&P500’s returns by using structural

breakpoints in the variance of Chinese stock market returns......................19

1.4.3.2. Modeling the return volatility of other US indexes by using structural

breakpoints in the variance of Chinese stock market returns......................20

1.4.3.3. Modeling the volatility of US stock market returns by using the

variance of Chinese stock market returns ...................................................21

1.5. Conclusion and Recommendation .............................................................23

References...........................................................................................................24

Appendix A. I......................................................................................................37

Appendix B. I......................................................................................................30

STUDY II:...........................................................................................................43

THE VOLATILITY OF CHINESE STOCK MARKET RETURNS AND

CAPITAL STRUCTURE OF CHINESE LISTED FIRMS ..........................44

2.1. Introduction.................................................................................................44

2.1.1. Research background.............................................................................44

2.1.2. Research motivations and Research contributions................................46

2.1.3. Research structure..................................................................................48

2.2. Literature review.........................................................................................48

2.3. Data, Empirical models and Variables......................................................52

2.3.1. Data........................................................................................................52

2.3.2. Empirical models and Variables ............................................................52

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2.4. Analyzing the volatility impact of Chinese stock market returns on the

adjusting capital structure of Chinese listed firms.........................................55

2.4.1. The volatility impact of Chinese stock market returns on market leverages

of Chinese listed firms.....................................................................................55

2.4.2. The volatility impact of Chinese stock market returns on bank debts of

Chinese listed firms .........................................................................................58

2.4.3. The volatility impact of Chinese stock market returns on trade credit of

Chinese listed firms .........................................................................................61

2.4.4. Robust checks........................................................................................63

2.4.4.1. Sample selection.............................................................................63

2.4.4.2. Model selection ..............................................................................64

2.4.4.3. Endogenous factors........................................................................65

2.4.4.4. Using quantile regression (QR)......................................................66

2.5. Conclusion and Recommendation .............................................................67

References...........................................................................................................68

Appendix A. II ....................................................................................................72

Appendix B. II ....................................................................................................73

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LIST OF FIGURES

LIST OF FIGURES IN STUDY I.....................................................................27

Figure 1.1. Examining the bidirectional volatility spillovers between the US and

China stock markets.............................................................................................27

Figure 1.2. The structural breakpoints in the variance of US stock market returns

are detected by the ICSS algorithm (2001–10/2020)...........................................28

Figure 1.3. The structural breakpoints in the variance of Chinese stock market

returns are detected by the ICSS algorithm (2001–10/2020) ..............................29

LIST OF FIGURES IN STUDY II ...................................................................72

Figure 2.1. The volatility of Chinese stock market returns per year and annual

China’s lending interest rate (2001-2019) ...........................................................72

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LIST OF TABLES

LIST OF TABLES IN STUDY I ........................................................................30

Table 1.1: Descriptive statistics ............................................................................30

Table 1.2: Unit root tests.......................................................................................31

Table 1.3: Break dates corresponding to structural breakpoints are detected in the

variance of stock market returns using the ICSS algorithm (2001-10/2020) .......32

Table 1.4: Modeling the volatility of stock market returns without using the

detected structural breakpoints (2001-10/2020) ...................................................34

Table 1.5: Modeling the volatility of SSEC’s returns using structural breakpoints

in the variance of US stock market returns (2001-10/2020).................................35

Table 1.6: Modeling the volatility of SZSC’s returns using structural breakpoints

in the variance of US stock market returns (2001-10/2020).................................37

Table 1.7: Modeling the volatility of Chinese stock market returns by using the

variance of US stock market returns.....................................................................39

Table 1.8: Modeling the volatility of S&P500’s returns using structural breakpoints

in the variance of Chinese stock market returns (2001-10/2020).........................40

Table 1.9: Modeling the volatility of DJIA’s returns using structural breakpoints in

the variance of Chinese stock market returns (2001-10/2020).............................41

Table 1.10: Modeling the volatility of Nasdaq Composite’s returns using structural

breakpoints in the variance of Chinese stock market returns (2001-10/2020) .....42

Table 1.11: Modeling the volatility of US stock market returns by using the

variance of Chinese stock market returns.............................................................43