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Nonlinear interdependence of the Chinese stock markets

Listed author(s):
  • Abdol S. Soofi
  • Zhe Li
  • Xiaofeng Hui

The methodologies and assumptions in financial integration studies are problematic and may lead to spurious empirical results. Using surrogate data analysis and the mutual prediction method of testing for nonlinear interdependence, it is feasible for an analyst, with a scant knowledge of the underlying dynamics of two dynamical systems, to show whether or not the systems are interdependent. This study applies these techniques in testing for nonlinear interdependence of three Chinese stock markets: Shanghai, Shenzhen, and Hong Kong. The empirical results of the present study indicate that the stock market series are nonlinear and that the Chinese stock exchanges are nonlinearly interdependent. Specifically, the evidence indicates that Shanghai and Shenzhen markets are bi-directionally interdependent, while Shanghai and Hong Kong as well as Shenzhen and Hong Kong markets are unidirectionally interdependent, with the direction of interdependence going from the mainland's markets to the Hong Kong market.

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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 12 (2012)
Issue (Month): 3 (November)
Pages: 397-410

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Handle: RePEc:taf:quantf:v:12:y:2012:i:3:p:397-410
DOI: 10.1080/14697688.2010.541488
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