Testing for Financial Market Integration of the Chinese Market with the US Market

Hatemi-J, Abdulnasser and Mustafa, Alan (2016): Testing for Financial Market Integration of the Chinese Market with the US Market.

Abstract

This paper investigates empirically whether or not the financial market of China is integrated with the financial market of the US. Unlike most previous studies on financial market integration, we allow for asymmetry in our investigation. The underlying data is transformed into cumulative partial sums by using a software component that is created by authors in Octave language. By estimating the asymmetric generalized impulse response functions we find that the financial markets of these two biggest economies in the world are linked interactively when the markets are falling. However, no significant impact between the two underlying markets are found when markets are rising. These results support the view that allowing for asymmetry in financial markets is important and it has crucial repercussions for both policy makers and investors.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Market Integration, Asymmetry, Impulses, US, China, Octave
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Adler, M., and Dumas, B. (1983) International portfolio choice and corporation finance: a synthesis, Journal of Finance, 38, 925–984.

Agmon, T. (1972) The relations among equity markets: a study of share price co-movements in the United States, United Kingdom, Germany and Japan, Journal of Finance, 4, 839–855.

Al-Ajmi, J. and Kim, J. (2012), Are Gulf stock markets efficient? Evidence from new multiple variance ratio tests, Applied Economics, 44, 1737-1747.

Alvarez-Ramirez J., Rodriguez E. and Echeverria J. C. (2009) A DFA approach for assessing asymmetric correlations, Physica A: Statistical Mechanics and its Applications, 388, 2263-2270.

Ang, A. and Chen J. (2002) Asymmetric correlations of equity portfolios, Journal of Financial Economics, 63, 443-494.

Büttner D. and Hayo B. (2012) EMU-related news and financial markets in the Czech Republic, Hungary and Poland, Applied Economics, 44( 31), 4037-4053.

Calvi, R. (2010) Assessing financial integration: a comparison between Europe and East Asia, Economic Papers, No. 423, European Commission.

Claus E. and Lucey B. (2012) Equity Market Integration in the Asia Pacific Region: Evidence from Discount Factors, Research in International Business and Finance, 26(1), 137-163.

Dooley, M. and Hutchinson, M. (2009) Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis, Journal of International Money and Finance, 28, 1331-1349.

Eaton J.W., Bateman D., Hauberg S. and Wehbring R. (2015). GNU Octave version 4.0.0 manual: a high-level interactive language for numerical computations. http://www.gnu.org/software/octave/doc/interpreter/ (Last viewed on 21/07/2016)

Espitia, M., and Santamaria, R., (1994) International diversification among the capital markets of the EEC. Applied Financial Economics 4 (1), 1–10.

Frey R. and Hussinger K. (2011) European market integration through technology-driven M&As, Applied Economics, 43(17), 2143-2153.

Granger, C. W. J. (1969) Investigating causal relations by econometric models and cross-spectral methods, Econometrica, 37, 424-439.

Granger, C.W., and Yoon, G. (2002) Hidden Cointegration. Department of Economics Working Paper. University of California. San Diego.

Hamao, Y., Masulis, R.W. and Ng, V. (1990) Correlations in price changes and volatility across international stock markets. The Review of Financial Studies 3 (2), 281–307.

Hammoudeh, S. and Choi K. (2006) Behavior of GCC stock markets and impacts of US oil and financial markets, Research in International Business and Finance, 20 (1), 22-44.

Hatemi-J, A. (2003) A new method to choose optimal lag order in stable and unstable VAR models, Applied Economics Letters, 10(3), 135-137.

Hatemi-J, A. (2008) Forecasting properties of a new method to choose optimal lag order in stable and unstable VAR models, Applied Economics Letters, 15(4), 239-243.

Hatemi-J A (2012a) Is the UAE Stock Market Integrated with the USA Stock Market? New Evidence from Asymmetric Causality Testing, Research in International Business and Finance, vol. 26(2), 273-280.

Hatemi-J A (2012b) Asymmetric Causality Tests with an Application, Empirical Economics, vol. 43(1), 447-456.

Hatemi-J A (2014) Asymmetric generalized impulse responses with an application in finance, Economic Modelling, vol. 36, 18-22.

Hatemi-J A. and Roca E. (2004) An Examination of the Equity Market Price Linkage between Australia and the European Union Using Leveraged Bootstrap Method, European Journal of Finance, 10(6), 475-488.

Hatemi-J A. and El-Khatib Y. (2016) An extension of the asymmetric causality tests for dealing with deterministic trend components, Applied Economics, forthcoming.

Hatemi-J A. and Mustafa A. (2016) TDICPS: OCTAVE Module to Transform an Integrated Variable into Cumulative Partial Sums for Negative and Positive Components with Deterministic Trend Parts, Statistical Software Components, Nr. OCT001, Boston College Department of Economics. Available on line. (https://ideas.repec.org/c/boc/bocode/oct001.html).

Hong, Y. and Zhou G. (2008) Asymmetries in Stock Returns: Statistical test and economic evaluation, The Review of Financial Studies, 20, 1547-1581.

Kenourgios D. and Samitas A. (2011) Equity market integration in emerging Balkan markets, Research in International Business and Finance, 25(3), 296-307.

Kim, J. and Shamsuddin, A. (2008) Are Asian stock markets efficient? Evidence from new multiple variance ratio tests, Journal of Empirical Finance 15, 518-532.

Liu, R. Y. (1988) Bootstrap procedures under some non-I.I.D. models, Annals of Statistics 16, 1696–1708.

Longin, F. and Solnik B. (2001) Extreme correlation of international equity markets, Journal of Finance, 56, 649-676.

Olivero M.P. and Madak R. (2013) Financial integration within Europe and the international transmission of business cycles among industrialized countries, Applied Economics, 45(1), 111-122.

Samarakoon, L. (2011), Stock market interdependence, contagion, and the U.S. financial crisis: The case of emerging and frontier markets, Journal of International Financial Markets Institutions and Money, 21, 724-742.

Smith, K.L., Brocato, J. and Rogers, J.E. (1995) An analysis of world capital market return/risk ratios: a test of global financial integration during the 1980–1991 period. Managerial Finance, 21 (8), 13–31.

Wheatley, S. (1988) Some tests of international equity market integration. Journal of Financial Economics, 21, 177–212.