Abstract
This study investigates the comovement across China, Hong Kong, and U.S. stock markets with the dynamic conditional correlation (DCC) model proposed in Engle (2002). This study answers three questions. First, will the policies of the Qualified Foreign Institutional Investors system (QFII) and the Split Share Structure Reform in China impact the correlations across China, Hong Kong, and U.S. stock markets? I find evidence that both reform policies have significant positive impacts on the corresponding correlations, except the correlation between Shenzhen and the U.S. stock markets. In addition, the Split Share Structure Reform has greater impact than the QFII regime does. Second, how do the exogenous variables, the excessive trading volume, and the daily high-low price differential of each stock market drive the correlations between the Chinese and two developed markets? Only these exogenous variables from Hong Kong and U.S. stock markets have significant effects on corresponding correlations. In addition, the daily high-low price differential has greater explanatory power than the excessive trading volume does. Third, do the developed markets lead the Chinese market? There is no evidence on this hypothesis.
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