Abstract
The speculative nature of the stock market in Mainland China has attracted the attention of many observers. However while the degree of integration of the Hong Kong market with its Mainland counterpart has monopolized the interest of researchers, they have neglected the diffusion of bubbles from the latter to the former. We thus propose the first study of such bubble migration. Focusing on the period 2005–2017, we use the Phillips et al. (Int Econ Rev 56:1043–1078, 2015a; Int Econ Rev 52:201–226, 2015b) recursive explosive root test to detect and date speculative episodes in both markets. We then implement the Greenaway-McGrevy and Phillips (NZ Econ Pap 50:88–113, 2016) methodology to detect the presence of migration between the two markets. We detect significant, but dwindling, bubble migration from Shanghai to Hong Kong.
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Notes
- 1.
While the PSY procedure is designed for the detection of positive bubbles, it also has the capability of identifying price crashes (Phillips and Shi 2017), which are defined as an abrupt discontinuity between asset prices and their underlying environment that produces large negative movements in asset prices.
- 2.
Evidence for the 1990s (Girardin and Liu 2003) shows the presence of a speculative regime with very high returns.
- 3.
See Jawadi and Prat (2017) for a critical review of existing empirical approaches of the relationship between stock prices and fundamentals.
- 4.
Existing research (reviewed by Fung et al. 2016; and earlier by Fong et al. 2007) suggest that the discount on the Chinese foreign shares can be explained by the following idiosyncratic factors: information asymmetries between domestic and foreign investors, different liquidity conditions, domestic investors’ speculative motive, differential risk, market conditions and short-sale restrictions.
- 5.
⌊.⌋ signifies the integral part of the argument.
- 6.
We exclude episodes associated with market downturns, as suggested in Phillips and Shi (2017). Such negative movements were detected for the log Shanghai composite PERs and the log H-share PERs from June 18, 2008, to December 3, 2008, and from December 14, 2011, to January 11, 2012.
- 7.
Such propping-up was rationalized by some observers by the argument that ‘Higher stock prices would also help China’s state-owned enterprises (SOEs) cut their debt levels because they can sell shares they own to pay back borrowings’ (Source: http://knowledge.wharton.upenn.edu/article/whats-behind-chinas-stock-market-gamble/).
- 8.
Even allowing for this degree of uncertainty in the estimation of the migration coefficient (see methodological section), the finding that this coefficient is stronger from Shanghai to the Hang Seng than to H-shares in 2007–2009 may seem a puzzle, even though it disappeared subsequently. This illustrates the complexity of the links between Greater China’s stock markets, which, as argued in the survey section above, existing literature has not helped us understand due to its ignorance of explosive roots.
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Girardin, E., Joyeux, R., Shi, S. (2018). Stock Market Bubble Migration: From Shanghai to Hong Kong. In: Jawadi, F. (eds) Uncertainty, Expectations and Asset Price Dynamics. Dynamic Modeling and Econometrics in Economics and Finance, vol 24. Springer, Cham. https://doi.org/10.1007/978-3-319-98714-9_8
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