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Two‐Factor Decomposition Analysis for Correlation between Mainland C hina and H ong K ong Stock Markets
Author(s) -
Wang Kent,
Miao Li,
Li Jiawei
Publication year - 2013
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2012.01160.x
Subject(s) - monetary economics , stock (firearms) , stock market , mainland , economics , financial economics , econometrics , biology , geography , archaeology , paleontology , ecology , horse
We analyzed the correlation between mainland C hina and H ong K ong stock markets based on cash flow ( CF ) news and discount rate ( DR ) news instead of considering market return as a whole. We decomposed stock return into CF news and DR news following C ampbell and V uolteenaho. Then, the VAR‐ BEKK ‐ GARCH method was used to investigate the time‐varying correlations of CF news and DR news in the two markets. We ensured robustness by using the structural break test from B ai and P erron to estimate the structural break points during the sample period. The results show that CF news and DR news in the mainland C hina market is more volatile than in the H ong K ong market, and DR news correlation is usually negative when the mainland C hina market is undergoing some reform. The estimated structural break points were matched to important events in the mainland C hina market and the two markets become increasingly correlated.