Hong Kong: a bridge connecting mainland China and the international market

Chow et al. (2011) apply three time-varying parameter methods to investigate the relationship
between the stock markets of Shanghai and New York and find that the mutual influence between
the two markets has increased since 2002. We reconsider their approaches and find that two suffer
from parameter underidentification and all three from underspecification of the parameter variation.
We include Hong Kong in an analysis based on standard and partial correlations over a running
window in order to depict the change in the mutual relationships between these three markets. It
is found that the observed increasing co-movement between Shanghai and New York is mainly due
to the channel of Hong Kong. So Hong Kong appears to connect mainland China with the global
market.