Does Free Trade Agreement Influence the Volatility Spillover between Stock Markets of China and Australia: A Wavelet Multiresolution GARCH-BEKK Approach

After prolonged negotiations, China and Australia eventually signed a free trade agreement (FTA) on June 17th, 2015. The agreement was put into effect on December 20th, 2015. Not only does the FTA create more opportunities for economic and trade cooperation between China and Australia, but also it contributes to the development of financial interaction between the two countries. This paper investigates the interactive mechanism of the stock market between China and Australia by comparing volatility spillover effects before and after the signing of the FTA. This pa per utilizes data from the Shanghai-Shenzhen 300 index and Australia S&P 300 index between August 1st, 2013 and March 31st, 2018. A GARCH-BEKK model is constructed to detect the transmission direction before and after the FTA, respectively. Afterwards, a time series of two stock market indices are processed by wavelet multiresolution to detect the long-term, medium-term, and short-term effect, respectively. Empirical results find that the signing of the FTA has increased the level of market correlation between China and Australia. Government policy can effectively influence stock markets through international trade and promote the economic development of both parties.