A study on the co‐movement and influencing factors of stock markets between China and the other G20 members

• Author: Zhixiu Guo,Sen Wang
• Published date: 01 January 2020
• DOI: http://doi.org/10.1002/ijfe.1727
• Date: 01 January 2020

RESEARCH ARTICLE

A study on the co‐movement and influencing factors of

stock markets between China and the other G20 members

Sen Wang

1

| Zhixiu Guo

2

1

Faculty of Economics, Shanxi University

of Finance and Economics, Taiyuan,

China

2

International Business School, Jinan

University, Zhuhai, China

Correspondence

Zhixiu Guo, International Business

School, Jinan University, 206 Qianshan

Lu, Zhuhai, Guangdong 519070, China.

Email: delfinaguo@163.com

Abstract

China A‐shares was formally included in the MSCI Emerging Market Index

in June 2018, which indicates that China has taken an important step in

the internationalization of the capital market. As the world's second largest

economy, stock market co‐movement between China and other of G20

members have become an important part of the world's economic analysis.

This paper selects the representative stock index returns rate of G20

members; uses the DCC‐MGARCH model to study the stock market volatility

co‐movement of China and other G20 members between January 1, 2015,

and March 31, 2018; and uses the two‐way fixed effects model to study on

the influencing factors of stock market co‐movement mechanism

including economic linkages between China and other G20 members, various

aspects of China's domestic fundamentals, and stock market development. It

shows that the performance and influencing factors of co‐movement

between China and other G20 members are time‐varying. Combined with

empirical results, this paper also makes recommendations from the perspec-

tives of investors, policy makers, stock market reform, and macroeconomic

transformation.

KEYWORDS

Co‐movement, DCC‐MGARCH, mechanism, stock markets, two‐way fixed effects model

1|INTRODUCTION

Because the emergence of economic globalization in the

1980s, the liberalization of commodities, services, and

transnational capital flows has integrated the world as a

whole, which leads to interdependence of different coun-

try economy and coordinated development. Financial

globalization is one of the core elements of economic

globalization in financial institutions, financial markets,

and free capital flow. With the continuous development

of technology and the relaxation of financial regulations,

international transactions have become more convenient

and investment in transnational asset allocation has

become more common. The integration deepening of

financial markets makes financial markets dependent of

various countries and have impact on each other. On

the one hand, financial globalization has promoted the

economic cooperation and globalization process of

various countries, on the other hand, increased the co‐

movement of financial markets in various countries.

Co‐movement means changes of attributes (such as

the price) of one asset associated with another because

of some commonality among financial assets.

1

The

scope of co‐movement includes co‐movement between

different assets or sectors in the same market, between

the same or different markets in the same country

(region), or between the same or different markets in

different countries (regions). Financial globalization

Received: 9 July 2018 Revised: 21 September 2018 Accepted: 21 March 2019

DOI: 10.1002/ijfe.1727

Int J Fin Econ. 2020;25:43–62. © 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 43

has greatly enhanced the financial markets' co‐

movement between different countries (regions), mak-

ing co‐movement a key concern for transnational

asset allocation.

The internationalization of stock markets in each

country is an important part of financial globalization.

With the collapse of the Bretton Woods system in the

1970s, the exchange rate system of developed countries

shifted from fixed to float gradually, and the control of

international capital flows started to liberalized. At the

same time, the stock markets' opening process of many

countries also began. Almost all stock markets of devel-

oped countries and many emerging countries had

achieved opening up in the 1990s, the globalization

degree of financial markets had greatly increased, and

the degree of stock market co‐movement had also deep-

ened. However, since the 1990s, the financial crisis

occurred frequently. In particular, the outbreak of the

global financial crisis in 2008 had not only caused shock

to economic and financial markets of the crisis centre

countries but has also transmitted to other countries'

markets rapidly. The stock market occurred a simulta-

neous collapse, showing a character of “contagion,”

which different from the past. Because the transmission

of fundamentals channel in the past cannot explain the

stock market co‐movement during the crisis, the co‐

movement characteristics and influencing factors of the

stock market before and after the financial crisis received

widespread attention again. However, scholars have not

reached a consensus conclusion on this issue yet. There-

fore, the purpose of this paper is to analyse the co‐

movement characteristics of the stock market and its

influencing factors at different stages, aims to provide ref-

erence for risk management decisions of investors and

policy makers.

G20 is an international economic cooperation forum

composed of 20 major economies in the world, whose

members cover the major developed markets and

emerging markets of six continents in the world. The

total gross domestic product (GDP) of G20 members

accounts for 85% of the global economy, and the total

trade volume accounts for 80% of the total global trade

volume. It is strong representative and has wide cover-

age, which is of great significance for studying the

growth of the global economy and the international

financial stability. In addition, according to the data of

the World Bank, the total stock market value of the

G20 members accounts for about 86% of the world stock

market. Table 1 shows the total stock market value of

the G20 members' in 2017 and its proportion of the

world stock market.

At present, China has become an important stock

market in Asia and the world. According to the data

of the World Bank, the stock market value of China

was 8.71 trillion U.S. dollars at the end of 2017,

accounting for 11% of the total market value of the

world stock market, which have become the second

largest stock market in the world. China stock market

not only reached such a huge scale within a short

period of 30 years but also improved the openness of

the stock market continuously and converged with the

world. Because joining the World Trade Organization

TABLE 1 Total market value and proportion of G20 member stock markets

Member

Market capitalization

(Trillion dollar)

Proportion

(%) Member

Market

capitalization

(Trillion dollar) Proportion (%)

United States 32.12 40.55 Australia 1.51 1.90

China 8.71 11.00 South Africa 1.23 1.55

EU 8.20 10.35 Brazil 0.95 1.21

Japan 6.22 7.86 Russia 0.62 0.79

United Kingdom 3.21 4.06 Indonesia 0.52 0.66

France 2.75 3.47 Saudi Arabia 0.45 0.57

Canada 2.37 2.99 Mexico 0.42 0.53

India 2.33 2.94 Italy 0.32 0.40

Germany 2.26 2.86 Turkey 0.23 0.29

Korea 1.77 2.24 Argentina 0.11 0.14

G20 67.77 85.55 World 79.21 100.00

Note. When adding the total market value of the G20 members' stock market, the market value of the German, British, French, and Italian stock markets is

deducted to avoid double counting.

44 WANG AND GUO