The Linkage Between US And Chinese Stock Market And The Trading Strategy Based On The Linkage

After the 2004 Chinese Stock Market Reform, we witnessed the increasing mutual influence between Chinese A-share market and the global stock market.With the latest financial market reform, especially the capital market reform, Chinese investors earned much accessibility to the global market, and the overseas investors are more willing to participate in the Chinese stock market. Meanwhile Chinese economy plays a much important role in manufacturing, technology, trade, finance and etc. among the world economy after the Global Financial Crisis. As a result, Chinese stock market has showed much significant connection with the global stock market.Currently, most of the strategies in China mainland covered the local stocks and indexes. Also, due to the restriction of short sell, most of the strategies are long only, or alpha strategy using Index future as the only hedging tool.This paper studied the correlation and causal relationship between US and Chinese stock index. At first glance, the two markets do not have significant comovement, the correlation coefficient in the past several years is even negative. However, when looked into the relationship in different time interval, a stable pair to conduct cross border pairs trading has been found. This trading strategy not only provide promising return on risk, but also provide Chinese investors a new way to conduct market neutral strategy and increase their ability to participate in overseas market, which has better liquidity as well as more applicable trading tools.