4. Conclusions
The focus of this paper is on exploring the linkage between US EPU innovations and four China-US stock market correlations - the SHA-S & P500, the SZA-S & P500, the SHB-S & P500, and the SZB-S & P500 correlation. Serving this purpose, we employ the ADCCX model that incorporates the EPU innovations as an exogenous variable, and estimate the model with and without structural change. Our efforts have delivered important results. It is the absolute changes in the US EPU index that have a negative impact on the correlations. For example, a larger rise or a larger fall in US policy uncertainty would both reduce the magnitude of subsequent co-movements between the Chinese and American stock markets. And, everything else constant, the reduction in the co-movements is the same across the rise and the fall in US EPU. These findings are robust to the asymmetric effects of non-EPU shocks, to a break in the correlation structure associated with China's QFII reform, and to the four different Chinese stock markets investigated. The results provide the first EPU evidence for stock-stock correlations in the international context, and are complementary to the existing EPU evidence for stock-bond correlations within a country. The results imply that changes in US EPU may affect mainly the purchases/sales in the US stock market, whereby leading to changes in the co-movements of the Chinese stock markets with the US stock market.
