To read the full version of this content please select one of the options below:

A Markov switching SVAR analysis on the relationship between exchange rate changes and stock returns in China

Juan Carlos Cuestas (Department of Economic and IEI, Jaume I University, Castelló de la Plana, Spain, Department of Economics and Finance, Tallinn University of Technology, Tallinn, Estonia, and Research Unit, Eesti Pank, Tallinn, Estonia)
Bo Tang (The University of Sheffield, Sheffield, UK) (Big Data Department, Weichai Power Co., Ltd., Weifang, China)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 28 April 2020

Issue publication date: 1 June 2021

Abstract

Purpose

This study investigates the spillover effects between exchange rate changes and stock returns in China. The authors find that no significant interconnections exist between stock returns and exchange rates changes.

Design/methodology/approach

Although the conventional structural VAR (SVAR) approach fails to examine the contemporaneous effects, the Markov switching SVAR model captures the volatile structure of the Chinese financial market. The regime-switching estimates indicate that volatile structure tends to be significant during two financial crisis periods.

Findings

Notwithstanding the fact that exchange rate changes cannot Granger-cause stock returns in the long run, its contemporaneous spillover effects on stock returns are found to be statistically significant.

Originality/value

This study aims to shed light on the spillover effects between exchange rate changes and stock returns in China, as the Chinese currency is becoming flexible and China’s stock market has undertaken important reforms. The spillovers between the two markets are of topical importance due to the increasing connections between China and the global economy.

Keywords

Acknowledgements

The authors gratefully acknowledge Arne Risa Hole, Gurleen Popli, Karl Taylor and the conference participants at the York-MMF-Bank of England Macro PhD workshop 2015 (York, UK), the XVII Applied Economics Meeting (Gran Canaria, Spain), the 3rd White Rose DTC conference (Sheffield, UK) and the Sheffield economics PhD annual conference for their insightful comments and suggestions. The authors are very grateful to Margarita Zabelina and Tao Zha for their kind help on the technical issues of this study. Comments from two anonymous referees are gratefully acknowledged. The usual disclaimer applies. Emails: cuestas@uji.es (J.C. Cuestas), bo.tang@hotmail.com (B. Tang).Funding: Juan Carlos Cuestas acknowledges the financial support from the MINEIC-AEI-FEDER ECO2017-85503-R and ECO2017-83255-C3-3-P projects both of them from ‘Ministerio de Economía, Industria y Competitividad’ (MINEIC), `Agencia Estatal de Investigación (AEI) Spain and `Fondo Europeo de Desarrollo Regional' (FEDER).

Citation

Cuestas, J.C. and Tang, B. (2021), "A Markov switching SVAR analysis on the relationship between exchange rate changes and stock returns in China", International Journal of Emerging Markets, Vol. 16 No. 3, pp. 625-642. https://doi.org/10.1108/IJOEM-06-2019-0463

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited