International Journal of Business and Economics Volume 17, No. 2 September, 2018

A Market Volatility Analysis of the Shanghai-Hong Kong Stock Connect Program

Tung-Zong (Donald) Chang

College of Business, Metropolitan State University of Denver, U.S.A.

Su-Jane Chen

College of Business, Metropolitan State University of Denver, U.S.A.

Hongmei Gu

Center for China Public Sector Economy Research & School of Economics, Jilin University, China

Aijie Jiang

School of Economics, Jilin University, China

Abstract

The Shanghai-Hong Kong Stock Connect Program is a major development in China’s overall financial reform effort, making its capital markets more accessible to global investment communities. The program utilizes the well-established Hong Kong Stock Exchange (HKEX) as a means to make Shanghai Stock Exchange (SSE) more accessible to foreign investors via the link to HKEX and in the process gives SSE more international exposure, though potentially at the expense of HKEX. We examine the impact of the Connect Program on the overall market volatility before and after two main dates: announcement date and launch date. The results show a positive market anticipation effect for both exchanges after the announcement, with their respective market risks declining significantly even before its official launch. However, the results also detect a negative effect in that both exchanges endured a significant surge in their respective volatility after program launch. Overall, the volatility risk of HKEX after launch was significantly below its pre-announcement level while SSE exhibited a completely opposite result.

Keywords：Hong Kong stock exchange, Shanghai stock exchange, Shanghai-Hong Kong stock connect, risk analysis, GARCH model.

JEL Classifications：G14, G15, G23.

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