Impact of major stock markets on China's stock market

What is it about?

We extend the stock market integration research by exploring the linkages among nine large stock markets that include former G8 nations (current G7 and Russia) and China. We use a major crisis-free period of 2009-2019 to avoid detecting linkages caused by interdependencies created by a major crisis. Our major purpose is to examine the impact of G8 stock markets on China’s market. We use standard time series methods: stationarity tests (ADF and PP unit root); long-run correlation tests (Johansen integration involving trace and maximum eigenvalue); impact of G8 markets on China’s market (VECM test); influence of G8 markets on volatility in China’s market (variance decomposition analysis); and, effect from shocks in G8 markets on China’s market (impulse response function). Major findings include the following. First, except for Germany and Russia, all markets have a significant causal influence on China with UK’s market having the greatest influence. Second, G8 markets are not the major source of short-run fluctuation in China’s market but over time can exercise a noteworthy impact with the UK market manifesting the largest impact. Third, there are occasions for international portfolio diversification with China’s market providing the greatest potential. Fourth, all markets provide a short-run window of profit opportunity.

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