The Changing Return Dynamics of the Hang Seng and the Shanghai Composite Indices.

Abstract

Diversification benefits to international investors depend fundamentally on the dynamic correlations of returns between market indices. The relationship between the Hang Seng and Shanghai Composite indices are analyzed in this research for the period before, during and after the 1997 British handover of Hong Kong. Diversification benefits between the two markets are shown to have reduced after the 1997 handover. A further series econometric analysis of the joint dynamics of these two markets shows an increasingly important role of the Shanghai Composite Index, particularly after 1999. The results of this research clearly demonstrate that diversification benefits have diminished between these two markets following the 1997 handover.