Association between New York and Shanghai Markets: Evidence from the Stock Price Indices/ Niujorko Ir Sanchajaus Rinkos: Akciju Kainu Indeksai

By Jarrett, Jeffrey E.; Sun, Tina | Journal of Business Economics and Management, February 2012 | Go to article overview

Association between New York and Shanghai Markets: Evidence from the Stock Price Indices/ Niujorko Ir Sanchajaus Rinkos: Akciju Kainu Indeksai


Jarrett, Jeffrey E., Sun, Tina, Journal of Business Economics and Management


1. Introduction

Our purpose is to study three sets of weekly price indices: Shanghai Stock Composite Index, NYSE Composite Index, and Hang Seng Composite Index provided by DataStream during the period of 1991-2009. Studies of these indices are important because of the rapid growth and influence of the Chinese economy on world, balance of trade and growth of Asian and other economies throughout the world (Chow et al. 1999). Previous studies (Chen 1991; Cheung, Ng 1998; Liaw 2007) described China as an economic power offering tremendous opportunities for investment and growing business returns. Their financial markets for the earlier years in their development were thought to be not fully developed when analyzed by the criteria developed by financial economists using criteria for analyzing Western equity markets (Fama 1990, 1991; Wei, Wong 1992; Zhong et al. 1999). Chow and Lawler (2003) analyzed the price index for the Shanghai Stock Exchange in comparison with the New York Stock Exchange Index in terms of its rate of return, volatility and structural changes in the movement of the index up until 2002. In this study, we propose to study the entire period from January 1991 to December 2009 and dividing period into sub periods (sub samples) to analyze change associated with time. The comparisons have the purpose of revealing the behavior of stock movements in an emerging market in comparison with an established Western market.

Another question relates to whether there is some integration between the New York and Shanghai markets as seen by studying the co-movement of stock prices in these exchanges. This will enable one to assess the degree of integration of the Chinese economy with that of the rest of the World as represented by the movement of prices in the New York Stock Exchange (NYSE). We will also look at the correlations among the Shanghai, NYSE and Hong Kong markets (Hang Seng Index) to examine their integration as well. Last, one notes that the Chinese financial markets are not open in the Western sense of the term but our study should yield some observations about the relative openness of the Chinese financial markets.

We examine both the rate of return and the volatility of the price indexes. The rate of return is the change in the natural logarithm of the price index for a given time period. We follow Chow and Lawler (2003, heretofore CL) and measure the volatility by the absolute value of the change rather by its variance. The absolute value is less sensitive to extreme value as compared with ARCH-type models to study the residual variance of a time series model. Stated differently, we study the volatility of the rate of return itself and not the residual in the time series model of the rate of return. Following CL, (1) the volatility in the rate of return and not the time series regression model residual is the subject of interest in financial research and (2), "since log stock price behaves approximately like a random walk, ..., the rate of return itself and the residual of an autoregression of this rate are almost the same" (CL, p. 18). The data for this study include three sets of weekly price indices: Shanghai Stock Composite Index, NYSE Composite Index, and Hang Seng Composite Index provided by Datastream during the period of 1991-2009. The rate of return is calculated as the change in the natural logarithm of the price index in a given period. The volatility of returns is calculated as the absolute value of the change in the natural logarithm of the price index in a given period. We further divide our sample into three subsamples: before 1997, after 1997 and before 2007, and after 2007. The entire sample period is from January 1991 to December 2009. Again, we follow CL in choosing the weekly data as the best choice among daily, weekly and monthly data.

To begin, we examine the characteristics of the equity markets in Shanghai and New York. We calculate the mean and variance of the rate of return and the mean and variance of the measure of volatility. …

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