The Integration of the Chinese Stock Markets Following the Shanghai–Hong Kong Stock Connect: Evidence from Cointegration, Linear, and Nonlinear Causality Analysis

28 Pages Posted: 28 Feb 2018

See all articles by Nikolai Sheung-Chi Chow

Nikolai Sheung-Chi Chow

Australian National University (ANU) - Research School of Economics

David Chui

The Hang Seng University of Hong Kong - Department of Economics and Finance

Andy Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance

Wing-Keung Wong

Asia University, Department of Finance

Date Written: February 19, 2018

Abstract

This study examines the impact of the Shanghai–Hong Kong Stock Connect on the degree of financial integration between the Hong Kong stock market and the Shanghai and Shenzhen stock markets in mainland China. By applying cointegration tests and linear and nonlinear Granger causality techniques on market capitalization and market index, we find that the stock markets from mainland China are increasingly influencing the Hong Kong stock market after the introduction of the Stock Connect scheme. Following the scheme’s introduction, the cointegration relationship between China and Hong Kong in terms of market capitalizations and market indices is also increasing. Moreover, Granger causality effects on market capitalizations and market indices from China remain strong, while the directional Granger cause of the two variables from Hong Kong to China has become weak or been rejected. Our study indicates that further opening of the Chinese stock markets enhances their leading roles, given that market capitalizations and market indices exhibit the highest degree of explanatory power regarding market correction toward long-run equilibrium. However with nonlinear causality test, our results indicate that Hong Kong stock market is still relevant to understand and predict China stock market after the introduction of the Stock Connect scheme.

Keywords: financial integration, cointegration, Engle–Granger causality, error correction, nonlinear causality, multivariate setting

JEL Classification: F36, C22

Suggested Citation

Chow, Sheung-Chi and Chui, David and Cheng, Andy and Wong, Wing-Keung, The Integration of the Chinese Stock Markets Following the Shanghai–Hong Kong Stock Connect: Evidence from Cointegration, Linear, and Nonlinear Causality Analysis (February 19, 2018). Available at SSRN: https://ssrn.com/abstract=3126375 or http://dx.doi.org/10.2139/ssrn.3126375

Sheung-Chi Chow

Australian National University (ANU) - Research School of Economics ( email )

Canberra
Australia

David Chui

The Hang Seng University of Hong Kong - Department of Economics and Finance

Hang Shin Link
Siu Lek Yuen
Shatin
United States

Andy Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance

Hang Shin Link
Siu Lek Yuen
Shatin
United States

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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