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Economic globalization is gradually strengthening linkages between capital markets in various countries. The United States and China, as the world’s first and second largest economy, we study the linkages between their stock markets and provide significant implications for national regulators and investors. This study selects the Shanghai Stock Exchange Composite Index and the Standard & Poor’s 500 Index to respectively represent the stock markets in China and the United States. The DCC-GARCH model is used to capture the dynamic correlation coefficient between the stock markets. The multiple regression analysis and the VAR model are used to explore financial liberalization and trade dependence, and to investigate their impact on the linkages between Chinese and US stock markets. This study found that because China’s overall financial liberalization is low, it has an inhibiting effect on the linkages between Chinese and US stock markets. The closer the trade links between China and the US, the stronger the linkages between their stock markets. Three macroeconomic indicators, GDP growth rate difference, CPI difference, and interest rate difference are not good explanations for linkage changes between the stock markets.

The Impact of Financial Liberalization and Trade Dependence on Stock Market Linkages between China and the US