China’s_Stock_Market_Integration_with_a_Leading_Power_and_a.pdf

China’s Stock Market Integration with a Leading Power and a 1 Close Neighbor Zheng Yi Associate Professor of Finance and Economics School of Finance Southwestern University of Finance and Economics Chen Heng Senior Analyst Fortune SGAM Fund Management Co.Shanghai Wing-Keung Wong Professor of Economics Department of Economics Hong Kong Baptist University 1 This paper is funded by a research grant at Southwestern University of Finance and Economics ( 211 Project, Phase III ) China’s Stock Market Integration with a Leading Power and a Close Neighbor Abstract Current integration and co-movement among international stock markets has been boosted by increased globalization of the world economy, and profit-chasing capital surfing across borders. With a reputation as the fastest growing economy in the world, China’s stock market has continued gaining momentum during recent years and incurred growing attention from academicians, as well as practitioners. Taking into account economic and geographical considerations, the US and Hong Kong are considerably the most comparable stock markets to China. As the usual vector error correction model (VECM) could overlook the long memory feature of cointegration residual series, which can in turn exert bias on the resulting inferences, we chose to employ a fractionally integrated VECM (FIVECM) in this paper to investigate the long-