An Empirical Analysis Of Co-movement For Shanghai And Hong Kong Stock Markets

The stock market’s co-movement is an important phenomenon that occurs in global stock markets, and it is a hot topic which researched by scholars recent years. With the RQFII system and the Shanghai-Hong Kong Stock Connect program’s implementation, Chinese mainland stock market’s co-movement with Hong Kong stock market has been increasing. This paper analyzes comovements within the context of the Economic base theory and Market infection theory with a drift component, a stochastic volatility component and a jump component. This paper uses Cointegration test, Granger causality test, DCC-GARCH model, BNS model and ABD model to analyze the leading relationship and dynamical correlation among China mainland and Hong Kong stock markets from January 1, 2008 to August17,2015. The sample was divided into three phases according to the paper. The paper answers these questions:(1) For the long-term equilibrium of the empirical results, in the first phase, there is no co-integration relationship between Shanghai stock market and Hong Kong stock market. But in the last two phases, after the RQFII system implement, there are co-integration relationship in opposite.(2)Looking from the results of principal components analysis, in the first phase, the Shanghai and Hong Kong stock market is independent. In the second and third phases, the relation of Shanghai stock market with Hong Kong’s stock market is strengthening.(3)This paper uses two kinds of nonparametric test to detecting the co-jump. The results indicate that there’s only a litter co-integration between Shanghai stock market and Hong Kong’s stock market and exist the co-jump between Shanghai stock market and Hong Kong’s stock market.This paper analysis the co-movement between Shanghai Stock market and Hong Kong that can help investor know about this relationship and let them forecast another stock market’s situation from this one. It can help them reduce risk and increase revenue. At the same time, this paper’s result can help government to adjust the policy such as the RQFII policy and the Shanghai-Hong Kong Stock Connect program which can enhance the capital market liquidity. It also can improve the allocation of capital resources, improve our capital market supervision mechanism, improve our internationalization process.