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    Evaluating the impact of market reforms on Value-at-Risk forecasts of Chinese A and B shares

    137686_137686.pdf (530.8Kb)
    Access Status
    Open access
    Authors
    Da Veiga, Bernardo
    Chan, Felix
    McAleer, M.
    Date
    2008
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    da Veiga, Bernardo and Chan, Felix and McAleer, Michael. 2008. Evaluating the impact of market reforms on Value-at-Risk forecasts of Chinese A and B shares. Pacific Basin Finance Journal. 16 (4): pp. 453-475.
    Source Title
    Pacific Basin Finance Journal
    DOI
    10.1016/j.pacfin.2007.08.001
    ISSN
    0927538X
    Faculty
    Curtin Business School
    School of Economics and Finance
    Remarks

    The link to the journal’s home page is: http://www.elsevier.com/wps/find/journaldescription.cws_home/523619/description#description. Copyright © 2007 Elsevier B.V. All rights reserved

    URI
    http://hdl.handle.net/20.500.11937/32080
    Collection
    • Curtin Research Publications
    Abstract

    This paper analyses the time-varying conditional correlations between Chinese A and B share returns using the Dynamic Conditional Correlation (DCC) model of Engle [Engle, R.F. (2002), "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models", Journal of Business and Economic Statistics, 20, 339-350.]. The results show that the conditional correlations increased substantially following the B share market reform, whereby Chinese investors were permitted to purchase B shares. However, this increase in correlations was found to have begun well before the B share market reform. This result has significant implication relating to the structure of the information flow between the markets for the two classes of shares. Value-at-Risk (VaR) threshold forecasts are used to analyse the importance of accommodating dynamic conditional correlations between Chinese A and B shares, and thus reflects the impact of the changes in information flow on the risk evaluation of a diversified portfolio. The competing VaR forecasts are analysed using the Unconditional Coverage, Serial Independence and Conditional Coverage tests of Christoffersen [Christoffersen (1998), "Evaluating Interval Forecasts", International Economic Review, 39, 841-862], and the Time Until First Failure Test of Kupiec [Kupiec, P.H., (1995), "Techniques for Verifying the Accuracy of Risk Measurements Models", Journal of Derivatives, 73-84]. The results offer mild support for the DCC model over its constant conditional correlation counterpart.

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