Using minute data of eligible A+H stocks under the Shanghai-Hong Kong Stock Connect (SHHKSC), we investigate the volatility spillover between the Shanghai and Hong Kong stock markets based on a generalized autoregressive conditional heteroskedasticity-X (GARCH-X) model with four exogenous variables, namely, volatilities of the corresponding stocks on the other market, volatilities of the indexes of both stock markets, and volatilities of the correlated stocks, which are selected using the dynamic conditional correlation model and bootstrap approach. Results show that after the launch of the SHHKSC, volatility spillovers are significant in both directions almost all the time, and the volatility spillover between the two stock markets tends to be larger when bidirectional capital flows under the SHHKSC increase or when important financial events occur. We also analyze the influences of the volatilities of correlated stocks and industries on the volatility spillover and volatilities of A+H stocks. The bidirectional volatility spillovers between Shanghai and Hong Kong stock markets do not change qualitatively after incorporating the volatilities of correlated stocks and industries in the GARCH-X model. Moreover, the average volatilities of the correlated stocks are shown to have significant influences on the volatilities of individual A+H stocks, and the influences increase when the local stock market shows a sharp rise or fall. Compared with the market indexes, the correlated stocks could be regarded as a more important and indispensable factor for individual A+H stocks’ volatilities modeling, which may carry more information than the industry.
- Volatility spillover
- Shanghai-Hong Kong Stock Connect
- DCC model
- GARCH-X model
- High-frequency data