| Summary: | This paper analyses the time-varying conditional correlations between Chinese A and B share returns using the Dynamic Conditional Correlation (DCC) model of Engle [Engle, R.F. (2002), "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models", Journal of Business and Economic Statistics, 20, 339-350.]. The results show that the conditional correlations increased substantially following the B share market reform, whereby Chinese investors were permitted to purchase B shares. However, this increase in correlations was found to have begun well before the B share market reform. This result has significant implication relating to the structure of the information flow between the markets for the two classes of shares. Value-at-Risk (VaR) threshold forecasts are used to analyse the importance of accommodating dynamic conditional correlations between Chinese A and B shares, and thus reflects the impact of the changes in information flow on the risk evaluation of a diversified portfolio. The competing VaR forecasts are analysed using the Unconditional Coverage, Serial Independence and Conditional Coverage tests of Christoffersen [Christoffersen (1998), "Evaluating Interval Forecasts", International Economic Review, 39, 841-862], and the Time Until First Failure Test of Kupiec [Kupiec, P.H., (1995), "Techniques for Verifying the Accuracy of Risk Measurements Models", Journal of Derivatives, 73-84]. The results offer mild support for the DCC model over its constant conditional correlation counterpart.
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