Review of Quantitative Finance and Accounting, 24: 343–357, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
Dynamic Linkages Between the Greater China
Economic Area Stock Markets—Mainland China,
Hong Kong, and Taiwan
Fannie Mae, 3900 Wisconsin Avenue N.W., Washington DC 20016, Tel: (202)752–5993
JOHN L. GLASCOCK
Grosvenor Professor of Real Estate Finance, Department of Land Economy, University of Cambridge, Cambridge,
Abstract. This research examines the linkages among three Greater China Economic Area (GCEA) stock
markets, including Mainland China, Hong Kong, and Taiwan, and two developed markets, Japan and the United
States. We ﬁnd that: (1) a random walk model is outpredicted by an autoregressive GARCH model and an
ARIMA model in all three GCEA markets; (2) the three GCEA markets are not cointegrated with either U.S.
or Japan but there exists weak nonlinear relationships between these markets; and (3) result from the innovation
accounting analysis reveals that the U.S. market has larger inﬂuence on the GCEA markets than the Japanese
market. Additionally, Hong Kong is the most inﬂuential among the three GCEA markets.
Keywords: market integration, diversiﬁcation, market efﬁciency
JEL Classiﬁcation: G10, G14, G15
Previous studies have shown that world capital markets are becoming more integrated
and that major ﬁnancial markets share increased co-movements (Ghosh, Saidi and Johnson,
1999; Masih and Masih, 1997; Corhay, Rad and Urbain, 1995; Allen and MacDonald, 1995).
This trend of globalization could be due to ﬁnancial deregulation in many emerging countries
as well as technological developments that facilitate information transfer. A common force,
as suggested by Campbell and Hamao (1992), may also drive economic activities across
boarders and the reductions in barriers facilitate a more closely integrated global market.
This common factor could arise from ‘business cycle risk’ as depicted by Fama and French
(1989), or changes in risk aversion as suggested by Marcus (1989), or some underlying
productivity factor that is global in nature.
Opinions and results presented in this paper are those of the authors and are not intended to represent the views,
policies, or interests of Fannie Mae. This paper is not the result of Fannie Mae related research and does not use
or cite Fannie Mae data sources.