6. Conclusion and some policy implications
This study aims to examine the impact of Shanghai-Hong Kong Stock Connect program on the dynamic relationship between Shanghai and Hong Kong stock markets. Our empirical research is among the first to investigate the impact of Shanghai-Hong Kong Stock Connect and provides a comprehensive analysis on the return and volatility behaviours of the Shanghai and Hong Kong stock markets using various quantitative methods. We use cointegration tests, Granger Causality tests and VAR model to examine the dynamics in the returns of the Shanghai and Hong Kong stock markets. We further conduct impulse response analysis and sensitivity tests. We also look at the volatility of the two stock markets by applying both univariate and multivariate GARCH models including GJR GARCH and BEKK GARCH models. A high frequency data (1 min's interval) of the Shanghai and Hong Kong stock markets indices is utilized to analyse the market dynamic behaviours. The dataset is from 02/07/2014 to 08/04/2015 which is about 3.5 months before and after the implementation for Shanghai-Hong Kong Stock Connect. Firstly, looking at the influence of Shanghai-Hong Kong Stock Connect, we find a significant long-term cointegration relationship between the Shanghai and Hong Kong stock markets in Post-Shanghai-Hong Kong Stock Connect period while we observe no cointegration relationship between these two markets before this program. Secondly, we observe that the return spillover effect from Shanghai to Hong Kong is faster and stronger than that from Hong Kong to Shanghai in the Post-Stock Connect period. Our impulse response analysis conducted as part of sensitivity tests shows that the Hong Kong stock market tends to be more responsive to the shocks in the Shanghai stock market in PostStock Connect period. Thirdly, the implementation of Shanghai-Hong Kong Stock Connect program has increased the conditional volatility level of both stock markets, since it opens the door for foreign investment and attracts both individual and institutional investors to participate in both Shanghai and Hong Kong stock markets. Fourthly, based on VAR BEKK model, we see an enhanced spillover effects in terms of mean and volatility from Shanghai to Hong Kong and weaker contagion effects from Hong Kong to Shanghai after the new initiative measures. This empirical evidence seems to suggest that the Chinese mainland stock markets could significantly affect the Hong Kong stock market through return and volatility spillover effects and plays a leading role in the information transmission regionally. In line with Raine and Adams (2015), our findings show that the enhanced openness of Chinese mainland stock markets does however contribute to the risk level, the market efficiency and the market activeness, since foreign investors generally tend to be more informed investor and contribute to the higher volatility. The success of Shanghai-Hong Kong Stock Connect provides valuable operational experience for expanding China's financial connections and further reforms on financial liberalization of the Chinese stock markets.
