ABSTRACT
This chapter examines whether and how extreme downside market risk is transmitted between the Chinese stock market and overseas capital markets. It focuses on the effect of capital flow barriers and related market frictions has a number of policy implications concerning the design and operation of emerging capital markets and the evaluation of direct and portfolio investments in developing countries. Singapore and South Korea, two newly industrialized economies in East Asia, and Japan, one of the most highly developed economies in the world, is representative of Asian countries. Monitoring extreme downside market risk is important for investment/portfolio diversification and risk management. The Chinese stock market has close ties with Asian stock markets, but its link with leading international capital markets is still weak or nonexistent. The closeness might indicate still significant barriers to international trade and investments. But on the other hand Chinese equities all the more seem to be an adequate device of portfolio diversification.
