Stock Returns, Volatility, and Cointegration among Chinese Stock Markets

This paper examines stockreturns, volatility, and cointegration among three Chinese stock marketsbeforeand afterHong Kong’sreturn to China. Theaverage daily returnsaremuch higherduring the first sub-period (from April1991 to June1997)and significantlyloweror even negativeduring the second sub-period (from July1997 to December2002). The mean adjusted changein volatilityis negativelyand significantly correlated with thelagged returns. This negative relation is mainly caused by a contemporaneous and significantly positive correlation between returnsand volatilityinthe firstsub-period. Thissignificant relationship disappears forthe Shanghai and Shenzhen Stock Exchanges and is even negative for the Hong Kong Stock Exchange during the second sub-period. Three Chinese stock markets arecointegrated over the entiresampleperiod and becomemore closelyrelated after Hong Kong’s return to China. Our results have important implications for both policy makers and individual investors.