Abstract
This paper examines whether the Shanghai-Hong Kong Stock Connect program drives market comovement between Shanghai and Hong Kong. We distinguish financial liberalization induced market comovement from that induced by other factors through comparing time-varying market correlations of Shanghai-Hong Kong with those of Shenzhen-Hong Kong. Our results show, if we ignore the period of market crash, the market correlation between Shanghai and Hong Kong does not significantly increase after launch of the program. Furthermore, inconsistent with theoretical prediction, we find that the correlation between Hong Kong and financially non-liberalized Shenzhen market increase much more than that between Hong Kong and financially liberalized Shanghai market in market turbulence.The results implicate the Shanghai-Hong Kong Stock Connect program is not the main fundamental force drives market comovement between Shanghai and Hong Kong in the short run.
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