Regime-dependent causality between Chinese and U.S. equity markets: Evidence from Markov switching models
Abstract
This study analyses the dynamic interdependence between Chinese and U.S. equity markets using Markov regime-switching vector autoregressive (MS-VAR) models. We cover monthly data from May 2007 to August 2024 within a single-currency framework on the New York Stock Exchange. Two broad-based Exchange-Traded Funds (ETFs)—SPY for the U.S. and GXC for China—serve as proxies for equity returns. The study identifies two regimes: Regime 1, characterised by periods of crisis, and Regime 2, representing stable market conditions. Causality tests based on the MS-VAR model reveal bidirectional causality between the markets in Regime 2, a relationship not detected by conventional Granger tests. In Regime 1, causality is unidirectional from the U.S. to China, indicating that Chinese investors are more exposed to U.S.-driven shocks during periods of market turbulence. The findings suggest the need for collaborative strategies to reduce market risks, address vulnerabilities, and manage spillovers arising from geopolitical tensions. • Markov-switching models reveal bidirectional causality in stable market conditions. • U.S. shocks impact China unidirectionally during financial crises. • Crisis-induced asymmetry underscores China's persistent exposure to U.S. shocks. • SPY outperforms GXC in risk-adjusted returns over the sample period. • Strengthening cooperation between the pair is essential for market stability.
Fields of Study & Subjects
Financial Risk and Volatility Modeling
Market Dynamics and Volatility
Financial Markets and Investment Strategies
Publication details
- Journal / source
- Research in International Business and Finance
- Publisher
- Elsevier BV
- Volume
- 83
- Pages
- 103285–103285
- Publication date
- 3 January 2026
- Language
- EN