A Study On The Segmentation And Integration Progress Of Stock Markets In China

The Chinese economy has gained rapid development since the reform and open-up about 30 years ago. With the market economy system preliminarily established, more attentions are paid to the quality of economic growth and some prominent problems such as the reform of financial market and market integration process. Compared with either the perfect competitive markets in theory or the matured financial markets in developed countries, some problems still exist in China. The most remarkable disadvantages of Chinese financial markets include its imperfection, incompleteness and segmentation, which greatly hurt the effectiveness of asset pricing and the efficiency of market operation. A lot of foreign research has been done on this issue since 1970s; these include testing the segmentation and integration of a specified market and explaining the stock price difference existing in segmented markets.However, this kind of research is relatively weak and limited in China. Most of the domestic studies focused on the segmentation test, and the methods and models used in them are inaccurate or inadequacy. This leads to widely different opinions in explaining the stock price difference existing in segmented markets. Moreover, the integration progress, as a key problem, has not been studied yet by domestic researchers. This thesis tries to investigate the problem of the segmentation and integration progress of China's stock markets, and attempts to find out the trace of the segmentation and integration progress as well as explore its intrinsic impelling force. This study is very important and useful in helping improve the efficiency of resource allocation and address some hot topics in our stock markets such as the reform of share-splitting reform, QFII and QDII systems and stock index futures.We firstly discuss the basic development situations of China's stock markets and introduce the background of our study, which gives a realistic logical beginning of this thesis. Secondly, we make a comprehensive literature review in related area to find the breakthrough point of our research, which provides a theoretical logical start point of this work. Thirdly, we construct models to analyze the trace of the segmentation and integration in China's stock markets, and then test the influence of some significant actions in our market on the progress of market segmentation and integration. This facilitates us to find the theoretic and realistic basis for the corresponding policies for enhancing the market integration. Finally, we make some conclusions. Based on the fundamental principles in economics, finance and sociology, we carry out an empirical test and positive analysis for our problem by using some econometric and mathematic techniques.The main results of this study include: (1) The China's stock markets demonstrate two different progressing traces: the degree of integration becomes weaker and weaker in Shanghai stock market, while stronger and stronger in Shenzhen market. The average degree of integration from Jan. 1999 to Feb. 2007 in Shanghai market, 0.47, is relatively lower than that in Shenzhen stock market, which is 0.79. We conclude there is still a long way for the two markets to be fully integrated. (2) The degree of the integration of Shanghai and Shenzhen stock markets rose after the opening of the B-share market to domestic investors. The opening of the A-share market to foreign investors significantly improves the integration process of Shenzhen market, while has little effect on Shanghai market. (3) Along with the opening of the B-share market to domestic investors and the A-share market to foreign investors, and the implementation of the share-splitting reform, there is a one-side return spillover effect from the B-share to the A-share, that is, the return of the B-share market has an forecast effect on the return of the A-share market. (4) There is a one-side volatility spillover effect from the A-share to the B-share in Shanghai stock market; while a mutual volatility spillover effect between the A-share market and the B-share market in Shenzhen, which means information can flow from either market to the other. (5) There is a one-side information flow from red chips to B-share and from B-share to H-share in Shanghai market, the later of which, however, can not be observed in Shenzhen market. Since the Red Chips Stocks always play an overall leading role in the information flow, it functions as a wind-vane of the market information and has a stronger effect of information guide on B-share than H-share.The innovations of the dissertation are listed as the following: Firstly, a regime-switching model is created to qualitatively portray the degree of the integration progress of the Chinese stock market. Secondly, a vector GARCH-M model is adoptted to analyze the spillover effects between A-shares and B-shares, which is based on the integration of analyzing retains and volatility of stock prices. Moreover, the thesis discusses the spillover effects and information flow among B- shares, H-shares, and Red Chip Stocks. Finally we study the problem of integration progress of Chinese stock markets from a macroscopical point of view, but not from a microcosmic vision as most existing research did, in which the discussion is limited in testing the segmentation and integration and explaining the stock price difference existing in segmented markets.