Return and volatility spillovers effects: Evaluating the impact of Shanghai-Hong Kong Stock Connect

This study investigates the impact of the recently introduced Shanghai-Hong Kong Stock Connect. Using high frequency data and dynamic forecasting techniques, we find that the new Stock Connect does contribute to the increasing importance of the Chinese mainland stock market and economic activity. A weak and unstable cointegration relationship is found after this event. Additionally, the Stock Connect has also increased the conditional variance of both stock markets. We observe a leading role of the Shanghai stock market to the Hong Kong stock market in terms of both mean and volatility spillover effects after the Stock Connect. Our study indicates that the opening up of stock markets in China could enhance the leading power, influence the risk level and improve the market efficiency of the Chinese mainland stock market, since the volatility spillover effect from Shanghai to Hong Kong is strengthened. Besides, our results have important policy implications, especially on how policy makers should deal with the increased market interconnectedness and for portfolio managers in choosing potential hedging instruments. The success of Shanghai-Hong Kong Stock Connect provides valuable operational experience for the forthcoming Shenzhen-Hong Kong Stock Connect which could further improve the market efficiency in China.