Regulatory Changes, Market Integration and Spillover Effects in the Chinese A, B and Hong Kong Equity Markets

We document the changes in the dynamic stochastic structure of the various industrial sectors of the Chinese A, B share markets and the Hong Kong share markets. We utilize a robustly estimated vector error correction model with multivariate generalized autoregressive conditionally heteroskedasticity (VECM-MV-GARCH) model to test for possible cointegrating vectors between the market segmentations pre and post deregulation of the Chinese B share market. Our results suggest that before deregulation there is weak evidence of cointegration between the A and B share markets.
However, post deregulation the situation changes and the segments appear to be significantly cointegrated. MV-GARCH results suggest that the conditional correlations of market/sector shocks also increase significantly over the sample period.