Return and risk interactions in Chinese stock markets

This paper investigates interactions between Chinese A shares and B shares traded on the Shanghai stock exchange (SHSE) and the Shenzhen stock exchange (SZSE), using an asymmetric multivariate time-varying volatility model. We find that there is a causal relation from B share markets to A share markets in the second moment but no such relation is present in the first moment, suggesting B shares contain more prior information than A shares about risk but not return, due to differences in investment objectives and investment scopes between the two groups of investors and barriers between the two markets. Moreover, there exist stronger links between shares of the same type, i.e., between the two A (B) share markets, than those between shares of different types. All four markets exhibit leverage effects.