Chinese Stock Market

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African Journal of Business Management Vol. 5(12), pp. 4657-4665, 18 June, 2011 Available online at ISSN 1993-8233 ©2011 Academic Journals

Full Length Research Paper

Are Chinese stock markets mature and open? Evidence from mature stock markets Yu Zhao*1, Yu Zhang1 and Chunjie Qi2

College of Economics and Management, East China Institute of Technology, Fuzhou, 344000, Jiangxi, P. R. C. 2 College of Economics and Management, Huazhong Agricultural University, Wuhan, 430070, Hubei, P. R. C. Accepted 11 February, 2011

The maturity and openness of Chinese stock markets can be measured by price impact of other mature stock markets on them. The article uses wavelet analysis to eliminate noise in stock price signal and analyzes to what degree Shanghai stock market is affected by volatility of stock markets of Hong Kong, Tokyo, New York and London by using Structural Vector Auto Regression (SVAR), impulse response analysis and variance decomposition. The results show that Chinese stock markets are becoming more and more mature and open, which are integrated into the global stock market gradually, which can be known from the response of Shanghai Composite Index, shocked by the other indices. Among all the mature stock indices in the paper, influence of Dow Jones Industrial Average on Shanghai Composite Index is most significant, followed by FTSE100 Index. Key words: Chinese stock markets, wavelet analysis, Structural Vector Auto Regression (SVAR), impulse response, variance decomposition. INTRODUCTION The development of Chinese capital market is relatively backward and closed. The interaction of stock markets at home and abroad was not obvious in the beginning of the 1990s (Yu, Chen and Huang, 2001; Wu and Xu, 2004). As the ability to maintain balance of payments is improving and domestic enterprises are accelerating their oversea listing financing, at present, western academic circles start to pay attention to the openness of Chinese stock market and its connection with foreign stock market (Cheng and Glascock, 2005; Girard and Rita, 2007; Bora, Pinar, Baris and Bülent, 2009). A lot of researches show that there is no significant dependency relation between Chinese and international stock market in the earlier days of Chinese stock market (Bailey, 1994; Johnson, 1994; Huang et al., 2000). Through observing stock markets of eight East Asian countries during 1995 to 1998, Tan (1998) confirmed the “contagion effect” of Southeast Asian financial crisis in Asian market by using Vector Error Correction Model. Chang (2001) found that financial crisis had a noticeable impact in American stock market by comparing with stock markets of Taiwan, Hong Kong, Japan and The USA, between 1997 and 1998. The paper is aimed at understanding the openness of Chinese stock market. The article uses wavelet analysis to eliminate noise in stock price signal firstly, and then applies SVAR (Structural Vector Auto Regression), impulse response function and variance decomposition to simulate impacts of Shanghai stock market affected by volatility of other stock markets at home and abroad. The dynamic inter-linkages between Chinese stock markets and other markets of developed countries reflect the openness of Chinese stock markets. The paper is organized into 6 sections. Section 2 provides a brief overview of empirical literature on interlinkages and interaction of stock markets. Section 3 describes methodology adopted in the study. Section 4 gives data used in the paper. Section 5 discusses the empirical results and section 6 concludes the results. LITERATURE REVIEW Roca (1999) investigated the interlinkages among equity markets of Japan, Korea, U.S, U.K., Singapore, Taiwan, Australia and Hong Kong by employing Granger causality test and Johansen co integration technique. His results revealed that no co integration exists between Australia and other markets but Australian market was found

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