China’s Stock Market Integration with a Leading Power and a Close Neighbor

Zheng Yi, Chen Heng and Wing-Keung Wong
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Zheng Yi: Department of Economics, Hong Kong Baptist University, Kowloon Tong, Hong Kong
Chen Heng: Fortune SGAM Fund Management Company

JRFM, 2009, vol. 2, issue 1, 1-37

Abstract: Current integration and co-movement among international stock markets has been boosted by increased globalization of the world economy, and profit-chasing capital surfing across borders. With a reputation as the fastest growing economy in the world, China’s stock market has continued gaining momentum during recent years and incurred growing attention from academicians, as well as practitioners. Taking into account economic and geographical considerations, the US and Hong Kong are considerably the most comparable stock markets to China. The usual vector error correction model (VECM) could overlook the long memory feature of cointegration residual series, which can in turn exert bias on the resulting inferences. To overcome its limitations, we employ a fractionally integrated VECM (FIVECM) in this paper to investigate the long-term cointegration relations binding China’s stock market to the aforementioned stock markets. In addition, by augmenting the FIVECM with multivariate GARCH model, the return transmission and volatility spillover between market return series were revealed simultaneously. Our empirical results show that China’s stock market is fractionally cointegrated with the two markets, and it appears that China’s stock market has stronger ties with its neighboring Hong Kong market than with the world superpower, the US market.

Keywords: stock markets; cointegration; FIVECM; MGARCH (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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