Based on the log return of Shanghai composite index, this paper constructs Hurst index by R/S analysis method to measure the long memory in stock market. The results show that there is strong long memory in China’s stock market. After the opening of Shanghai-Hong Kong stock connec tion , the long memory in China’s stock market has been reduced, so does the memory cycle. It means that the Shanghai-Hong Kong stock connec tion has a positive effect on enhancing the effectiveness of China’s stock market.
In the early 1990s, the Shanghai stock exchange and Shenzhen stock exchange set up one after another, which marks the birth of the national stock market in China. After more than 20 years of development, the Initial Public Offerings (IPO) system and supervision system have been reformed for many years, at the same time, the reform of the shareholder structure in listed companies was basically completed, China’s stock market is in the process of continuous improvement, but it is not completely integrate with the international market. On April 10th, 2014, Hong Kong’s securities and futures commission and the China securities regulatory commission jointly issued a notice which include the approval of the Shanghai stock exchange and the Hong Kong stock exchange to carry out the interconnection mechanism of Shanghai-Hong Kong stock connect market trading, and allow investors in Shanghai and Hong Kong stock market to buy and sell Hong Kong stocks and A-shares through their local stock exchanges, then Shanghai-Hong Kong stock connect officially opened on November 17, 2014. With the gradual improvement of the interconnectivity in Shanghai and Hong Kong stock market, it marks that China’s capital market opening to the outside world has an important step.
On August 16, 2016, the premier Li Keqiang made it clear that the related preparation work of the Shenzhen-Hong Kong stock connect almost had been ready on the executive meeting of the state council, and the state council has approved the deep port general plan. On October 11, 2016, the Hong Kong stock connection exchange, a wholly-owned subsidiary of the Hong Kong stock exchange, and the settlement of Hong Kong and the Shenzhen stock exchanges and China Securities Depository and Clearing Corporation Limited signed a quartet agreement about the Shenzhen-Hong Kong stock connect, which means that the open of Shenzhen-Hong Kong stock connect has entered the countdown.
Based on the deep port open event, using Rescaled Range Analysis (R/S) method to test the change of the Chinese stock market’s long-term memory, to analyze the impact of Shanghai-Hong Kong stock connect and Shenzhen-Hong Kong stock connect which is about to open on the effectiveness of the Chinese stock market. This paper is organized in the following manner. In Section 2, the literature review, the main research results domestic and foreign scholars researched on the long memory of stock market are described. In Section 3, the empirical analysis and the main empirical results are presented. Section 4 is devoted to summarize the conclusions and the implications of the paper.
The existence of the stock market’s long-term memory means the predictability of the market, which also means that the market is not effective. Hurst (1951) [
Chen Menggen (2003) [
This article selects 1500 trading days’ data of the Shanghai composite index from the July 20, 2010 to September19, 2016 as sample data. April 10, 2014 as the node, the period is divided into two stages, the stage of before the opening of Shanghai-Hong Kong stock connect is from July 20, 2010 to April 9, 2014, a total of 900 trading days’ data, the other stage of after the opening of Shanghai-Hong Kong stock connect is from April 10, 2014 open on September 19, 2016, a total of 600 trading days’ data.
For the convenience of analysis, in this paper, the Shanghai Composite Index is processed as follows, so that this paper gets the logarithm yield rate of Shanghai Composite Index.
R t = log P t P t − 1 (1)
In the equation above, Pt represents the closing price of the Shanghai Composite Index at time t, Rt represents the logarithm yield rate of Shanghai Composite Index at time t.
To draw the sequence of yield rate of the after pretreatment, as shown in
Before using R/S analysis method, making unit root test to yield rate of the
Shanghai Composite index of the two stages before and after the opening of Shanghai-Hong Kong stock connection. Results presented in
The Logarithm yield rate sequence of Shanghai Composite index { R t } , this paper
ADF | PP | KPSS | |
---|---|---|---|
Before the opening | −29.8408*** | −29.8407*** | 0.071554 |
After the opening | −22.7491*** | −22.7453*** | 0.091551 |
Note: *, **, ***, respectively show to reject the null hypothesis under 10%, 5%, 1% significant level.
makes a regression analysis under the situation of Rt as dependent variable and R t − 1 as the independent variable, and then getting the residual sequence { X t } of the (Autoregressive) AR (1) model of Rt. Divide { X t } into A subsequences whose length is n, where n ≥ 3 . For each subsequence, the definition of range is as follows:
R t = max ∑ k = 1 t ( X k − X ¯ n ) − min ∑ k = 1 t ( X k − X ¯ n ) , t = 1 , 2 , 3 , ⋯ , n (2)
Set St as a standard deviation of the subsequence, then the R / S of a subsequence whose length is A is defined as follows:
( R / S ) n = 1 A ∑ k = 1 A R k S k (3)
Then the Hurst index H can be calculated as follows:
K n H = ( R / S ) n (4)
After the logarithm based on the Equation (4), and then making Ordinary Least Squares (OLS) regression, the slope of regression equation is the estimate value of Hurst index H.
In order to determine the memory cycle of the sequence, define Vn statistics as follows:
V n = ( R / S ) n / n (5)
when 0.5 < H < 1, the sequence is a long-term memory, Vn tilts upward about log(n); When H = 0.5, the sequence is an independent random process, Vn is horizontal about log(n); When 0 < H < 0.5, the performance of the sequence is anti-persistence, Vn tilts downward about log(n). Therefore, when the morphological of Vn about log(n) changes, then memory cycle ends and long-term memory disappears.
Segment the yield rate sequence of the Shanghai Composite index in the stage of before the opening of Shanghai-Hong Kong stock connect which includes 900 trading days and the stage of after the opening which includes 600 trading days, at the same time, calculate the relevant index of each subsequence, which is shown in the following
Make a graph according to Vn and log(n), as shown in
Before the opening | After the opening | ||||
---|---|---|---|---|---|
n | (R/S)n | Vn | n | (R/S)n | Vn |
450 | 25.0820 | 1.1824 | 300 | 20.2374 | 1.1684 |
300 | 19.3770 | 1.1187 | 200 | 19.2153 | 1.3587 |
225 | 18.2278 | 1.2152 | 150 | 12.6057 | 1.0292 |
180 | 14.5659 | 1.0857 | 120 | 12.2280 | 1.1163 |
150 | 13.7442 | 1.1222 | 100 | 10.8047 | 1.0805 |
100 | 11.4431 | 1.1443 | 75 | 9.0145 | 1.0409 |
90 | 10.2553 | 1.0810 | 60 | 7.9608 | 1.0277 |
75 | 9.5861 | 1.1069 | 50 | 7.1806 | 1.0155 |
60 | 8.6374 | 1.1151 | 40 | 6.5442 | 1.0347 |
50 | 7.8138 | 1.1050 | 30 | 5.5302 | 1.0097 |
45 | 6.8808 | 1.0257 | 25 | 5.0747 | 1.0149 |
36 | 6.2012 | 1.0335 | 24 | 4.9823 | 1.0170 |
30 | 5.5354 | 1.0106 | 20 | 4.5581 | 1.0192 |
25 | 4.7816 | 0.9563 | 15 | 3.7010 | 0.9556 |
20 | 4.3109 | 0.9639 | 12 | 3.1186 | 0.9003 |
18 | 3.9980 | 0.9423 | 10 | 2.8305 | 0.8951 |
15 | 3.6387 | 0.9395 | 8 | 2.3971 | 0.8475 |
12 | 3.0849 | 0.8905 | 6 | 1.9615 | 0.8008 |
10 | 2.7786 | 0.8787 | 5 | 1.7443 | 0.7801 |
9 | 2.5951 | 0.8650 | 4 | 1.4247 | 0.7123 |
6 | 1.9615 | 0.8008 | 3 | 1.1046 | 0.6377 |
5 | 1.7086 | 0.7641 | |||
4 | 1.4301 | 0.7150 | |||
3 | 1.1022 | 0.6364 |
Shanghai-Hong Kong stock connection, long-term memory cycle is 150 days. Similarly, after the opening of Shanghai-Hong Kong stock connection, long-term memory cycle is 120 days, and memory cycle decreased in some extent.
According to the different memory cycle and relevant indicators before and after the opening of Shanghai-Hong Kong stock connect, make OLS regression estimation for the yield rate residual sequence, the results as shown in
In this paper, we use the R/S analysis method to construct the Hurst index to measure the degree of strength of long-term memory. The study finds that the Hurst index of China’s stock market was more than 0.6, indicating that there existed a strong long-term memory in the market. After the opening of Shanghai- Hong Kong stock connection, the Hurst index decreased from 0.6369 to 0.6272, even though the Hurst index decreased with a small range. The result revealed that the long-term memory of China’s stock market declined to some extent. At the same time, before the opening of Shanghai-Hong Kong stock connection, the long-term memory cycle was 150 days, and the long-term memory cycle was shortened to 120 days by the opening. This evidence further confirms the decline in long-term memory. This reduction in long-term memory shows that the opening of Shanghai-Hong Kong stock connection has a positive effect on improving the effectiveness of China’s stock market.
Combined with the empirical results, this paper has the following three aspects of the revelation.
Firstly, China’s stock market still has strong long-term memory to some extent, which discovers that there still exist many shortcomings and particularity in China’s stock market, Examples are as follows, the stock market is short of the instrument of avoiding risk, the information disclosure system is imperfect and the trading action of investors in China’s stock market often tend to the same direction, producing agglomeration effect. As a result, the Government of China needs to improve and innovate the regulatory system; in addition, to strengthen the education of investors is also important.
Secondly, although the opening of Shanghai-Hong Kong stock connect reduced the long-term memory of China’s stock market, the degree of reduction is low. This result above is related to the restrictions of Shanghai-Hong Kong stock
N | intercept | Hurst index | Ct | R2 | F |
---|---|---|---|---|---|
Before the opening (3 ≤ n ≤ 150) | −0.2093 | 0.6369 | 0.2090 | 0.9960 | 4496.93 |
After the opening (3 ≤ n ≤ 120) | −0.1965 | 0.6272 | 0.1928 | 0.9931 | 2315.35 |
connect itself, for example, the investment threshold of Shanghai-Hong Kong stock connect is higher than A-share stock market for both domestic investors and Hong Kong stock market’s investors, and not only that, the degree of openness of the market is not high, in addition, the trading mechanism of two stock markets is different and so on. In order to reduce the long-term memory of China’s stock market and further promote the healthy and sustainable development of China’s stock market, Chinese government should gradually release these restrictions in the process of developing the Shanghai-Hong Kong stock connection.
In the end, referring to the analysis of this paper, the opening of Shenzhen- Hong Kong stock connection will have a significant impact on the long-term memory of China’s stock market. Compare to the Shanghai-Hong Kong stock connect, the pressure of the opening of Shenzhen-Hong Kong stock connection is increased, along with the opening enlargement, the impact which China’s stock market can feel will be further expanded.
Zhang, Y.Y. (2017) A Study on the Impact the Shanghai-Hong Kong Stock Connect Making on the Long- Term Memory of Chinese Stock Market. Open Journal of Social Sciences, 5, 90-97. https://doi.org/10.4236/jss.2017.54009