Analysis Of Spillover Effect Between A Stock Index And H Stock Index

Hongkong, the window of China facing the world, has maintained close economic relationship with mainland. Under the call of government’s go-out strategy, plus with the natural platform in Hongkong, more and more mainland enterprises listed overseas in recent years. Because most of these enterprises are also listed domestically, so they can be called cross-listed companies. As capital flows between Hongkong and mainland move faster, cross-listed stock price are much more than before. Analyzing the spillover mechanism between cross-listed AH stocks can provide more investment opportunities and risk control measures for investors. What’s more, comparing the price discovering function of different stock markets can ensure regulatory authorities to make relevant regulations wisely.As to the explanation of spillover effect between cross-listed stock prices, there are two influential theories, namely,"territory advantage hypothesis" and "financial center hinterland hypothesis". Domestic scholars have scarecly ever analyzed the problem which hypothesis is more suitable for the case between the mainland and Hongkong. Based on the cross-listed A stock index and cross-listed H stock index, this paper research into the direction and magnitude of spillover effects between the two index, which not only gives an answer to the above problem, but also helps us to understand information transmission mechanism in spillover effect. After make clear the fundmental characters of spillover effect, this paper did not stop here, but choose to further explore the components of spillover effects. Specifically,in order to peel off the domestic macroeconomic information carried by cross-listed A stock index, Shenzhen A stock index is introduced into the empirical model. Subsequently, Hang Seng Hongkong35index is introduced into model to strip the international macroeconomic information in cross-listed H stock index. Finally, the paper has a sectional study on spillover effect between the two stock indexes. Unlike the majority of domestic scholars who chose the through-train or2008financial crisis as the cut-off point, this paper focus on the event of the first extended trading in Hongkong stock market and analyse the change of spillover effects between stock markets in the mainland and Hongkong.To test the mean spillover effect and volatility spillover effect, time-series analysis methods are used in the paper. Specifically, in the test of mean spillover effects, the method is to construct VAR model and take the Granger causality test, while in the test of volatility spillover effects GARCH-BEKK model and the Wald nonlinearity test are frequently used. Through three stages in the empirical analysis, several conclusions come into being. Firstly, both"territory advantage hypothesis" and "financial center hinterland hypothesis" are applicable to the case between mainland stock market and Hongkong stock market, but "financial center hinterland hypothesis" among the two is more close to reality. In the spillover effect from cross-listed A stock index to cross-listed H stock index, mainly is the domestic macroeconomic information spillovered, and the amount of micro-enterprise business information is relatively much less. Discovery function of stock price remains to be further improved in mainland stock market. Secondly, in the spillover effect from cross-listed H stock index to cross-listed A stock index, H stock index not only transfer the international macroeconomic information, but also transmit some depth information which is the about the macroeconomic information and micro-enterprise business information from the mainland and can not be easily replicated. The result demonstrated that investors in Hongkong pay more attention to the value of listed enterprises, their ability to price for assets is superior to mainland investors. Thirdly, the sectional studies on the first extended trading show that the first time to extend trading time effectively improved the price discovery function in H stock market. In contrast, the second time to extend trading time only have a small effect on improving the price discovery function in Hongkong stock market.At the end of the paper policy recommendations and investment recommendations corresponding to the empirical conclusions are put forward. Specifically, government need to accelerate the development of institutional investors in mainland stock market, strengthen value-oriented investment strategies among individual investors to eliminate the speculation atmosphere, gradually improve trading rules to perfect the discovery function of stock price. If the government plans to extend the trading hours in mainland stock market, it should consider openning A stock market earlier rather than extending the trading time at other time. For investors, in the gradual integration of the mainland stock market and Hongkong stock market, cross-listed A stock price and cross-listed H stock price will inevitably move toward convergence and then a great arbitrage space will emerge, investors should grasp the precious opportunity to profit.The last part gives the statistical arbitrage program code and its potential arbitrage profit based on cross-listed A stock index and RMB denominated cross-listed H stock index.