Analysis of dependence in China and oversea stock markets under subprime mortgage crisis — Based on Markov switching model

Three-regime Markov switching model is used to approach the changes of dependence structure in the stock markets of China, Hong Kong, Japan, Britain and Australia before and during the American subprime mortgage crisis. It is found that the dependences decrease in Australia, Britain and Japan. However, correlation between China and Japan presents an increase. Meanwhile, correlation model based on copula theory is used for comparative analysis. It indicates that dependence changes during the subprime crisis and volatility increases in all markets. The highest dependence is exhibited in the stock markets between Australia and UK, while markets between China and the other four markets display low dependence comparatively. Besides, we regard the Markov switching model as a better way to capture the volatility of stock markets than the traditional method.