Volatility Spillover Benefits of the Hang Seng Index and Shanghai Composite Index: A Vector Autoregressive (VAR) Model and Granger Causality Test Analysis

Abstract

This study aims to explore the volatility spillover benefits between two major stock markets in Hong Kong and Shanghai, namely the Hang Seng Index and the Shanghai Composite Index. Empirical analysis is conducted using a Vector Autoregressive (VAR) model and Granger causality test based on daily return data from 2013 to 2023. The research finds a significant volatility interaction between the Hang Seng Index and the Shanghai Composite Index, which is more pronounced during periods of global economic instability. Impulse response analysis reveals that positive shocks in Hang Seng Index lead to increased volatility in the short term for the Shanghai Composite Index but gradually weaken to a weak negative effect in the long term. Conversely, positive shocks in the Shanghai Composite Index have a short-term inhibitory effect on the Hang Seng Index but transform into a weak promoting effect in the long term. These findings have important implications for investors and policymakers in risk management, forecasting future stock market trends, and capital allocation.