Financial liberalization and stock market cross-correlation: MF-DCCA analysis based on Shanghai-Hong Kong Stock Connect

• Published in: Physica A 2018-02, Vol.491, p.779-791
• Main Authors: Ruan, Qingsong, Zhang, Shuhua, Lv, Dayong, Lu, Xinsheng
• Format: Article
• Language: English
• Subjects: Financial liberalization; MF-DCCA; MF-DFA; Shanghai-Hong Kong Stock Connect; Stock market cross-correlation
• ISSN: 0378-4371; 1873-2119
• DOI: 10.1016/j.physa.2017.09.031

Based on the implementation of Shanghai-Hong Kong Stock Connect in China, this paper examines the effects of financial liberalization on stock market comovement using both multifractal detrended fluctuation analysis (MF-DFA) and multifractal detrended cross-correlation analysis (MF-DCCA) methods. Results based on MF-DFA confirm the multifractality of Shanghai and Hong Kong stock markets, and the market efficiency of Shanghai stock market increased after the implementation of this connect program. Besides, analysis based on MF-DCCA has verified the existence of persistent cross-correlation between Shanghai and Hong Kong stock markets, and the cross-correlation gets stronger after the launch of this liberalization program. Finally, we find that fat-tail distribution is the main source of multifractality in the cross-correlations before the stock connect program, while long-range correlation contributes to the multifractality after this program. •Multifractality of Shanghai stock market is smaller after this connect program.•Cross-correlation between Shanghai and Hong Kong stock markets gets stronger.•Long-range correlation contributes to the multifractality of cross-correlation.