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It takes two to tango: A regime‐switching analysis of the correlation dynamics between the mainland Chinese and Hong Kong stock markets
Author(s) -
Ho KinYip,
Shi Yanlin,
Zhang Zhaoyong
Publication year - 2016
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12110
Subject(s) - stock (firearms) , mainland china , financial economics , mainland , volatility (finance) , economics , portfolio , econometrics , emerging markets , monetary economics , geography , finance , china , archaeology
This paper proposes a regime‐switching model to examine the correlation dynamics of the mainland Chinese and Hong Kong stock markets with high‐frequency A‐, B‐, H‐shares and Red Chip indexes. We find significant evidence of volatility persistence and asymmetries in these markets. Our model further suggests all correlations are significantly time‐varying with various patterns and co‐persistence in both low‐ and high‐correlation states. Our findings have important implications for both policymakers and investors, such as understanding the extent and nature of integration between the mainland Chinese and Hong Kong stock markets over time and developing dynamic strategies for optimal hedging and portfolio management.