We wish to thank the Associate editor of IRF, an anonymous referee, Guo Hui, Kai Li, Michael ONeil, Yongmiao Hong, seminar participants in CCER, Peking U, SWUFE, Dalian Commodity Exchange (DCE), and the 2012 SMU ‘Asset Price Bubble’ Summer Institute for helpful comments. Wang wish to acknowledge financial support of NSFC #71101122. This article is an independent research which represents only the authors’ personal views. All remaining errors are our own.
Two-Factor Decomposition Analysis for Correlation between Mainland China and Hong Kong Stock Markets†
Version of Record online: 27 JUL 2012
© 2012 The Authors. International Review of Finance © International Review of Finance Ltd. 2012
International Review of Finance
Volume 13, Issue 1, pages 93–110, March 2013
How to Cite
Wang, K., Miao, L. and Li, J. (2013), Two-Factor Decomposition Analysis for Correlation between Mainland China and Hong Kong Stock Markets. International Review of Finance, 13: 93–110. doi: 10.1111/j.1468-2443.2012.01160.x
- Issue online: 5 MAR 2013
- Version of Record online: 27 JUL 2012
- NSFC. Grant Number: #71101122
We analyzed the correlation between mainland China and Hong Kong stock markets based on cash flow (CF) news and discount rate (DR) news instead of considering market return as a whole. We decomposed stock return into CF news and DR news following Campbell and Vuolteenaho. Then, the VAR- BEKK-GARCH method was used to investigate the time-varying correlations of CF news and DR news in the two markets. We ensured robustness by using the structural break test from Bai and Perron to estimate the structural break points during the sample period. The results show that CF news and DR news in the mainland China market is more volatile than in the Hong Kong market, and DR news correlation is usually negative when the mainland China market is undergoing some reform. The estimated structural break points were matched to important events in the mainland China market and the two markets become increasingly correlated.