Abstract: In the background of free flow of capital and sufficient information, financial markets always represent the coordinated change by the same macro-economic factors, the spillover effect between the foreign exchange market and stock market has been the hot issues in economic and financial study. Stochastic volatility model is a discretization of the stochastic differential equations which, can describe the characteristics of the volatility in financial time series by an unobserved random process and performs better in practice. In this paper, GC-MSV model is used to study the spillover effect between the foreign exchange market and stock market after the Currency reform. It is shown that there is a negative dynamics price spillover correlation between the foreign exchange and stock markets overall the currency. In the continued appreciation and shock phase, there exist an asymmetric volatility spillover effects and the spillover effects of volatility has been reduced over time.

Key words: financial markets, volatility spillover effect, GC-MSV model