The Dependence Between Shanghai and Hongkong Stock Markets Before and After the Connect Program

Abstract

Based upon the Copula function, this paper investigates the time-varying dependence between Shanghai and Hongkong stock markets before and after the connect program. The author uses GARCH model to estimate the marginal distribution of returns, so as to setup the Copula models. According to the empirical analysis, it is found that the dependence between the two markets has been enhanced after the connect program. Besides, there exists asymmetric tail dependence between the two markets, and the dependence between lower tails is higher than upper tails, which means that investors are more sensitive to bad news in the markets rather than good news.