Do the Shanghai-Hong Kong & Shenzhen-Hong Kong Stock Connect programs enhance co-movement between the Mainland Chinese, Hong Kong, and US stock markets?

The Shanghai-Hong Kong Stock Connect (SH-HK-SC) and Shenzhen-Hong Kong Stock Connect (SZ-HK-SC) programs aim to strengthen the openness of Mainland Chinese stock market. They are considered milestones in the development process of the Mainland Chinese capital market. This paper studies the effects of the SH-HK-SC and SZ-HK-SC programs on the co-movement between the Mainland Chinese, Hong Kong and U.S. stock markets in terms of dynamic conditional correlation by the t-copula-DCC-GARCH model. We find that both programs do not substantively enhance the daily price co-movements among the examined markets for all pairs except the Hong Kong-U.S. pair. The combination effect of the programs significantly enhances the weekly price co-movements between the Mainland Chinese and Hong Kong, or U.S. stock market after the SZ-HK-SC program, with an insignificant effect on the Hong Kong-U.S. pair. Although the multiple breakpoint tests for the daily data and weekly data exhibit somewhat different results, the structural breakpoints of the dynamic correlation coefficients among the stock markets easily appear during the subprime crisis. Some possible explanations are provided for the results, and correspondent suggestions are given for investors and policymakers.

Automated summary

This study examines the effects of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect on the relationships between the Mainland Chinese, Hong Kong, and U.S. stock markets. It finds that while the programs do not substantially enhance daily price co-movements, they significantly increase weekly price co-movements after the Shenzhen-Hong Kong Stock Connect.