The Integration of Capital Markets: Correlation Analyses of the Market Indexes in Greater China Economies‪.‬

ABSTRACT This paper investigates whether the stock price movements in Shanghai, Hong Kong and Taiwan reflect the increasing economic integration among the three economies. The results indicate that the degree of correlation between the returns of the market indexes in Hong Kong and Taiwan is comparable to that of economic integration between the two economies. But, there is no evidence of similar degree of correlation between the Shanghai market and the Hong Kong and Taiwan markets, despite the increasing economic integration. Further, there is no evidence to suggest that the returns of the Shanghai market have become more integrated with Hong Kong and Taiwan markets over the testing period. The paper provides a possible explanation for the results and discusses several policy implications.