With a total of about $1.15 trillion market capitalization in 2008, China’s banking stock group becomes the most dominant industry sector in Shanghai, which ranks in fi rst place within the emerging stock markets. China’s banking stock group in Shanghai is chosen as the market for close examination in this study. Th is study examines the dynamic relationship between bank equity volatility, system shift s, and the business cycle in Shanghai’s bank stock market. Th e data are obtained from the China Economic Databases (CED), which comprise monthly bank stock returns of the Shanghai Stock Exchange. Th e causality between bank stock return volatility and Shanghai’s business cycle is strongly evident.