COMPLETION REPORT
Volatility Spillovers between Stock and Exchange Rate Markets: Evidence from China and Japan
Dr. Zhaoyong Zhang
Professor of Finance & Economics
Edith Cowan University

1. Outcomes:
This research project aims to investigate the dynamic volatility spillover effects of the Chinese stock and exchange
rate markets on the Japanese and other East Asian markets by using high frequency data from 1990 to the mostrecent year and to examine the mean and volatility transmission mechanism between exchange rates and stock
market return in China and Japan. With a well-established theoretical framework in a multi-country and multimarket settings, we have constructed various news sentiment measures based on the event sentiment and news
novelty and employed the Dynamic Conditional Correlation GARCH (DCC-GARCH) model and the modified
Multivariate Generalized Autoregressive Conditional Heteroskedastic-in-Mean Vector Autoregression(MGARCH-M VAR) model to assess the impacts of news flows and sentiment on RMB volatility and volatility
spillovers between Chinese and Japanese equity and exchange rate markets by using the high frequency news data.
Even with the reduced budget amount and despite the recent COVID-19 outbreak, I’ve managed to complete thisproject with great success. A series of articles have been produced and published in international academic journals(two papers are still pending for further revisions).
The major findings of this project are: (1) It is found with strong empirical evidence that there exist co-volatility
effects among the financial markets in China and Japan during the period in 1998–2018, and the volatility of RMB
exchange rates contribute to the co-volatility spillovers across the financial markets. (2) The return shock from thestock markets can also generate co-volatility spillover to the foreign exchange markets. The bidirectional relationshipreveals that both the fundamental hypothesis and the investor-induced hypothesis are valid. (3) The results also showthat the spillover effects led by the stock market in Japan are stronger than that from the foreign exchange markets
and the Chinese stock markets, implying that market with higher accessibility has greater spillover effects onto othermarkets. (4) We also found that the average co-volatility spillover effects among the RMB exchange markets andthe stock markets in Japan and China are generally negative. These findings have important policy implications forrisk management and hedging strategies. (Qin, Zhang and Zhang, 2018, Risks)
I have also conducted some research related to this project to investigating some research issues on other East Asianfinancial markets, for instance, examining the efficiency of the Chinese stock market, Singapore (non-)CPF
investment schemes and foreign exchange rate markets, as well as impact of China’ internationalization process, andgot them published with an acknowledgement of financial support from the Foundation.
In conclusion, this project has been very productive and successful, and led to a series of important publications ininternational academic journals.

2. The Future Plan:
I’m planning to continue the current research on the East Asian financial market integration, with a particular focus
on the two largest markets of China and Japan, to comprehending and advancing our understanding of the spillover
effects of China’s rise and RMB internationalization on the regional financial market integration, and the bilateral
economic interaction between China and Japan. This will contribute to the existing literature on how the public
information flows affect the foreign exchange value of the regional currencies and how the cross-market spillover
effects affect Sino-Japanese firms’ operations as well as the bilateral trade and investment between China and Japan.
We look forward to the Foundation’s continued support in the future.

Once again, many thanks for the financial support from the Sumitomo Foundation which has made this research
project a great success.

Publication of the Results of Research Project:
Verbal Presentation (Date, Venue, Name of Conference, Title of Presentation, Presenter, etc.)
1. The preliminary results of this research project entitled “News release and volatility spillover effects in theChinese stock index spot market and index future market” were presented in an academic seminar atShandong University, China, on 19th December 2019.

Presenter: Zhaoyong Zhang

2. The preliminary results of a paper entitled “Uncertainty Effects of Chinese Renminbi on Asian Exchange
Rate and Stock Return: A Bivariate GARCH-in-Mean VAR Analysis” coauthored by Sheue Li Ong,
Kiyotaka Sato and Zhaoyong Zhang, were presented in The 4th International Conference On China’s Riseand Internationalization: Challenges and Impacts Regionally and Globally in Ningbo, China, 7-8 December
2018.

Presenter: Sheue Li Ong

3. The preliminary results of this research project entitled “News and Return Volatility of Chinese BankStocks” were presented in The 86th International Atlantic Economic Conference in New York, UnitedStates, 11-14 October 2018.

Presenter: Zhaoyong Zhang

Thesis (Name of Journal and its Date, Title and Author of Thesis, etc.)
1. F.M. Qin, J.R. Zhang and Z.Y. Zhang (2018), “RMB Exchange Rates and Volatility Spillover acrossFinancial Markets in China and Japan”, Risks (MDPI: Web of Science and Scopus), 2018, 6, 120 126; doi:10.3390/risks6040120. (Indexed in Scopus (Elsevier), Web of Science, ABDC)
2. K.Y. Ho, Y.L. Shi and Z.Y. Zhang (2018), “Public Information Arrival, Price Discovery and DynamicCorrelations in the Chinese Renminbi Markets”, The North American Journal of Economics andFinance (Elsevier), 46, 168-186. https://doi.org/10.1016/j.najef.2018.04.005. (Indexed in Scopus(Elsevier), SSCI, Web of Science, ABDC)
3. J.H. Qi, Z.Y. Zhang and H. Liu (2018), “Pioneers versus Followers: The Internationalization Processof Chinese MNCs”, The North American Journal of Economics and Finance, (Elsevier), 46, 272-285.
https://doi.org/10.1016/j.najef.2018.04.012. (Indexed in Scopus (Elsevier), SSCI, Web of Science,

ABDC)
4. K.Y. Ho, Y.L. Shi and Z.Y. Zhang (forthcoming), “News and Return Volatility of Chinese BankStocks”,

International

ReviewofEconomics&Finance(Elsevier),https://doi.org/10.1016/j.iref.2018.12.003. (Indexed in Scopus (Elsevier), SSCI, Web of Science,
Q1, ABDC)
5. X.Y. Shen, Albert K. Tsui and Z.Y. Zhang (2019), “Volatility Timing in CPF Investment Funds inSingapore: Do They Outperform Non-CPF Funds?” Risks (MDPI: Web of Science and Scopus), 2019,7, 106: 1-16; doi:10.3390/risks7040106. (Indexed in Scopus (Elsevier), Web of Science, ABDC)
6. J.Y. An, K.Y. Ho and Z.Y. Zhang (2019), “What drives the liquidity premium in the Chinese stockmarket?”,

The

North

AmericanJournalofEconomics

andFinance(Elsevier),https://doi.org/10.1016/j.najef.2019.101088. ( Scopus (Elsevier), SSCI, Web of Science, ABDC)
7. J.H. Qi, H. Liu and Z.Y. Zhang (forthcoming), “Exchange Rate Uncertainty and the Timing of Chinese
Outward Direct Investment”, International Review of Economics & Finance (Elsevier). (Indexed inScopus (Elsevier), SSCI, Q1, Web of Science, ABDC)
8. JR Zhang and Z.Y. Zhang (accepted), “CSR, Media and Stock Illiquidity: Evidence from Chinese
Listed Financial Firms”, Finance Research Letters, (Elsevier). (Indexed in Scopus (Elsevier), SSCI,Web of Science, Q1, ABDC “A”-rank)
Book (Publisher and Date of the Book, Title and Author of the Book, etc.)