Auditors’ lifestyle

Abstract

This paper assesses whether China's stock market is integrated with the global market during 2000–2010 within the framework of an augmented CAPM. We firstly use Kalman smoothing technique to obtain time-varying global and national systematic risks for the once-restricted A- and unrestricted B-share indices in China's stock exchanges. Then we investigate how these risks are priced while controlling for possible structural changes using the Markov regime-switching technique. We find evidence of partial integration in terms of positively priced global and national systematic risks in most cases. However, the unrestricted Shanghai B-share market is found to be generally segmented from the global market. The degree of integration is therefore not simply a matter of the degree of restriction, confirming that documenting barriers to investment (or the lack of them) is insufficient to prove segmentation (or integration). Given that the domestic systematic risk is still priced, there is scope for international portfolio diversification into China.