Chinese stock market integration with developed world: A portfolio diversification analysis

Abstract

This study investigates integration dynamics between the Chinese stock market and major developed counterparts—Australia, Germany, Japan, the UK, and the US—focusing on portfolio diversification. Using a comprehensive analytical approach from 2012 to 2022, encompassing events like the Belt and Road Initiative, the Shanghai market crash, US-China trade tensions, and the COVID-19 pandemic, the research employs descriptive statistics, unit root tests, cointegration analysis, and VECM-based Granger Causality Tests. Findings indicate modest integration, endorsing diversified portfolios for developed country investors due to higher returns in China with acceptable risk. Unit root analysis confirms cointegration with developed indices, indicating relatively low integration. Granger Causality Tests reveal bidirectional causality, emphasizing mutual influence. Notably, no causal link exists between the US and China, possibly due to regulatory disparities and the trade war. The study enhances understanding of Chinese stock market dynamics, supporting global economic intertwining and urging further openness of China's domestic shares for economic growth.

Keywords

• Cointegration
• Portfolio diversification
• Major trading partners
• Stock market integration
• VECM-based granger causality test
• Short-run granger causality