Globalization and Cointegration – Study of Stock Markets in China and USA
By Zhengyuan Zhu (Yr 13)
Abstract This paper investigates the integrating and long term casual underlying relationship of share prices in Shanghai Stock Exchange (China) and S&P 500(USA) 1 . On the basis of the Dickey Fuller unit root and the Durbin Watson test, my results suggest that both shares have an integration of order one (unit root). More importantly, a long term relationship measured by cointegration does not exist between these two indices, they are statistically weakly cointegrated.
1. Introduction
a. Impact of globalization
By the end of last century, the international economy started moving towards a single market, due to the liberalization of trade and production, which allowed better and more efficient allocation of resources. 2 The growth and integration of the world capital markets is in fact one of the engines of globalization. As foreign exchange and bond markets become more integrated, the law of one price begins to apply throughout the world. The national stock exchanges are moving towards increasing linkages to other international stock exchanges. The linkages are extended from developed stock markets to other emerging stock markets, as well as from stock markets to other financial and banking systems. 3 The Shanghai Stock Exchange (SSE) was founded on Nov. 26th, 1990 and in operation on December 19th the same year. “Shares in mainland China have recorded their biggest one-day fall for more than eight years following a sell-off towards the end of the trading day . The Shanghai Composite closed down 8.5% at 3,725.56 after more weak economic data raised concerns about the health of the world's second largest economy.” From BBC News 27 July 2015. b. Brief introduction to Chinese and USA stock markets
1 I am grateful to Wenda Zhang who gives me valuable supervision in writing this paper. 2 Armanious, A. N. R. (2007) Globalization Effect On Stock Exchange Integration . 3 O.Lerche III, C. (1995) The Conflicts Of Globalization .
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