Abstract
This study seeks to figure out the effects of China’s capital account liberalization on its stock market returns and volatility. We take China’s Shanghai – Hong Kong Stock Connect as a representation of China’s capital account liberalization. We also take the Shanghai Stock Exchange market to generalize China’s stock market. We apply daily univariate models and monthly multivariate model to test the effects of the Shanghai – Hong Kong Stock Connect net flows northbound and southbound on the Shanghai stock market returns and volatility for the period from November 17, 2014 through November 19, 2017. The result we find is that there is no significant effect of China’s capital account liberalization on its stock market returns and volatility. Compared with other studies on emerging stock markets, our results do support some empirical regularity. By adding a policy variable into our model, we raise the model’s determination coefficient, which helps us better simulate China’s capital account liberalization and its stock market.
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