Abstract
Using DCC, ADCC and GO-GARCH models, 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. The results of the three variants of multivariate GARCH models consistently show that, if we ignore the period of market crash, the market correlation between Shanghai and Hong Kong does not significantly increase after the launch of the program. Furthermore, inconsistent with theoretical prediction, we find that the correlation between Hong Kong and financially non-liberalized Shenzhen market increases much more than that between Hong Kong and financially liberalized Shanghai market in the market turbulence. The results implicate the Shanghai-Hong Kong Stock Connect program is not the main fundamental force that drives market comovement between Shanghai and Hong Kong in the short run. This finding is further supported by the results of optimal hedge ratios and downside risk measures, which hold important risk management implications for investors in these markets.
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