Investment Implications from the Analysis of Dynamic Conditional Correlations between Stock Index and Stock Index ETFs in China

Abstract

Purpose - With the rapid expansion of ETFs around the world, various index ETFs have been introduced and significantly grown in China. This paper attempts to investigate the dynamic conditional correlation among stock indexes and ETFs in China, which are assumed to be closely related in nature.<br /> Design/Methodology - This paper examines the dynamic conditional correlation among the Chinese CSI 300 Index, AMC CSI 300 ETF Index, and E Fund Seeded CSI 300 ETF Index using the ARMA DCC GARCH model.<br /> Findings - Numerous studies provide evidence that abnormal shocks in advanced stock markets, such as US and EU markets, disseminate to the indexes and index ETFs in a different manner. This paper shows that the dynamic conditional correlation among these indexes is quite strong, suggesting the presence of co-movement. Additionally, stronger co-movement is observed during financial crises, such as the China stock market crash in 2015 and the COVID-19 pandemic after 2020. Our study highlights that although the AMC CSI 300 ETF and the E Fund Seed CSI 300 ETF Index track the China CSI 300 Index, they exhibit different patterns at specific moments, such as financial crises, stock market crashes, and the COVID-19 epidemic.<br /> Originality/value - The results of this paper provides insight into the dynamic co-movement of China's Index ETFs. The findings in this paper will also offer implications for investment strategies and risk management for Korean passive institutional investors with stakes in Chinese stock indexes and ETFs in the asset allocation process.