Analysis of Chinese Stock Market's Characteristics: Applying Time-Varying Cointegration Model

Abstract

At the beginning of 2015, many economists concern about unstable stock markets in China. While shocks of the financial crisis in 2008 remain, they warn a new financial shock in China. ‘HuGangTong’ permits trade beyond market barriers which is established in 2014. Despite of imperfect sources of crisis, stock and real economy in China is separated. Moreover there are different limitations among similar markets. We apply a time-varying cointegration method focused on two similar markets. The model replaces eigenvector of traditional vector error correction model on time-varying Chevyshev polynomial. Its advantage is in likelihood ratio function which has higher power due to Chevyshev polynomial against fourier time smoothing function suggested by Park, Hahn (1999). The A-shares market is more affected by HuGangTong. But there is almost no impacts of HuGangTong in the B-shares market. The result implies that instability in the Chinese stock market can be interpreted as an increase in speculative liquidity.