Chinese and World Stock Market Co-Movements: Two Findings

To address this concern, we took a look at how connections in between the 2 significant Chinese exchanges– the Shanghai Composite Index and the Hang Seng– and their equivalents around the globe have developed. Then we divided the time periods into three classifications– 1997 to 2004, 2005 to 2014, and 2015 to present– to see what sort of pattern emerged gradually.

Chinas emergence as a global economy on the world stage is possibly the greatest financial story of the last thirty years. During the last numerous years, Chinas market has improved, a number of its tech business have debuted on Chinese stock exchanges through going publics (IPOs), and the countrys markets and exchanges have opened to a degree to overseas investors.

How then have the co-movements of Chinas stock exchanges developed over the last 25 years as the nation has become a greater presence in international markets?

We separated 2 essential findings.

China has ended up being more and more incorporated into the world economy. Yet regardless of this pattern, Chinas stock markets still in some cases relocate idiosyncratic ways relative to other world exchanges. Due to short sale restrictions, amongst other functions, Chinas exchanges have actually sometimes been vulnerable to included volatility, with notable bubbles and busts happening on the Shanghai Composite Index in 2007 and 2015.

The Shanghai Composite has actually ended up being much more extremely associated with the S&P 500 over the last quarter century. In between 1997 and 2004, it had a 0.08 connection. In our newest sample, the connection coefficient soared to 0.47 and represents the best shift in co-movement over our whole research study period.

Correlations: Shanghai Composite to S&P 500

We believe it comes down to 2 aspects or a mix thereof: the opening of Chinas markets to the rest of the world and the growing existence of banking and tech stocks on the Shanghai Composite.

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All informed, Chinas emergence on the world stage has actually shifted correlations across its stock exchange. The Shanghai Composite is now a lot more associated with international markets, having nearly doubled its connection coefficient in just 10 years.

In between 1997 and 2004, it had a 0.08 correlation. The correlation coefficients of just about all the exchanges around the world, even the XLK US tech index, have all jumped with the Shanghai Composite in between 1997 and the present. S&P 500NikkeiMumbaiFTSECAC40DAXMOEXTSXASX200XLKShanghai Comp.0.280.300.300.250.210.250.250.290.260.25 Hang Seng0.630.500.510.640.550.560.500.640.580.61 Our 2nd vital takeaway is that Shanghai Composite increasing connection with world markets is not reflected on the Hang Seng. Worldwide indexes have actually traditionally had higher correlation with the Hang Seng, but co-movement in between it and other exchanges has not increased all that much over the last quarter century. The S&P 500 had a connection coefficient of 0.59 with the Hang Seng from 1997 to 2004.

S&P 500NikkeiMumbaiFTSECAC40DAXMOEXTSXASX200XLK ShanghaiComp.0.350.310.380.310.310.340.330.380.410.37 Hang Seng0.720.590.760.720.660.680.660.700.730.67 January 2015 to Present

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The concern is why. What discusses the increasing correlations?

AnhMinh Luu.
AnhMinh Luu is a junior at George Mason University studying accounting and management info systems (MIS). At Mason, he works as a teaching assistant for FNAN 303– Financial Management.

Correlations: Shanghai Composite and the Hang Seng vs. Global ExchangesAugust 1997 to December 2004

No similar trend has emerged on the Hang Seng, however. Its correlation with most world exchanges has hardly budged over the previous 25 years..

Image credit: © Getty Images/Johannes Mann.

Perpetuity Correlations: Shanghai Composite, the Hang Seng and Global Indexes.

August 1997 to December 20040.08 January 2005 to December 20140.35 January 2015 to Present0.47 The huge dive in Shanghai Composite co-movements is not isolated to the S&P 500. The correlation coefficients of almost all the exchanges worldwide, even the XLK United States tech index, have all jumped with the Shanghai Composite in between 1997 and today. The one exception? Russias MOEX.

Juhee Hong.
Juhee Hong is a senior at George Mason University pursuing her bachelors degree in economics with a minor in finance. She has an interest in international economic advancement and monetary markets. At Mason, she is working as a teaching assistant for the monetary management course and is anticipating utilizing her abilities and understanding in the financing market after graduation.

Derek Horstmeyer.
Derek Horstmeyer is a professor at George Mason University School of Business, specializing in exchange-traded fund (ETF) and shared fund efficiency. He currently acts as Director of the new Financial Planning and Wealth Management major at George Mason and founded the very first student-managed mutual fund at GMU.

Whether these connection trends continue in an era of increased geopolitical competitors will be something to view for in the months and years ahead.

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S&P 500NikkeiMumbaiFTSECAC40DAXMOEXTSXASX200XLKShanghaiComp.0.470.470.320.330.360.420.180.380.320.44 Hang Seng0.610.540.510.510.510.490.390.290.410.55.

All posts are the viewpoint of the author. As such, they need to not be construed as financial investment advice, nor do the opinions expressed necessarily show the views of CFA Institute or the authors company.

S&P 500NikkeiMumbaiFTSECAC40DAXMOEXTSXASX200XLKShanghai Comp.0.280.300.300.250.210.250.250.290.260.25 Hang Seng0.630.500.510.640.550.560.500.640.580.61 Our 2nd crucial takeaway is that Shanghai Composite increasing correlation with world markets is not shown on the Hang Seng. Worldwide indexes have historically had greater correlation with the Hang Seng, however co-movement between it and other exchanges has actually not increased all that much over the last quarter century.

S&P 500NikkeiMumbaiFTSECAC40DAXMOEXTSXASX200XLKShanghaiComp.0.080.140.16-0.090.020.080.260.13 -0.060.08 Hang Seng0.590.410.280.630.500.500.490.640.580.66 January 2005 to December 2014

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