Dynamic linkage between the Chinese and global stock markets: A normal mixture approach.

The paper provides an empirical framework for analyzing the dynamic linkage between Chinese and thirty major stock markets globally. In doing so, we employ the bivariate normal mixture model, a weighted average of two normal distributions that can reveal both the degree and structure of dependence between markets. We show that the level of dependence strengthened since 2004 in general, whereas the contagion effects spread heterogeneously during the global financial crisis. We also examine potential factors that affect the stability of the linkage by capturing regime switching behavior. The results suggest that business cycle synchrony plays a significant role in increasing the instability of dependence between the Chinese and global stock markets, while the impact of asynchrony is negligible. Additionally, we observe increased dependence and unstable structure, associated with the implementation of China's capital market liberalization policies and RMB exchange rate reform. • We analyze the nonlinear linkage between Chinese and global stock markets. • Bivariate normal mixture model is proposed to reveal both the degree and structure of dependence. • The linkage changes over time and across regions. • Business cycle synchrony increases the instability of dependence. • Financial openness and RMB exchange rate reform enhance the degree of dependence and the instability of dependence structure. [ABSTRACT FROM AUTHOR]