Economic Integration and Structure Change in Stock Market Dependence: Empirical Evidences of CEPA

Transcription

1 Journal of Appled Fnance & Banng vol. 4 no ISSN: (prn verson) (onlne) Scenpress Ld 014 Economc Inegraon and Srucure Change n Soc Mare Dependence: Emprcal Evdences of CEPA Chung-Chu Chuang 1 and Jeff.C. Lee Absrac hs sudy nvesgaes dependence srucure changes beween he Hong Kong and Chnese soc mares as a resul of he Closer Economc Parnershp Arrangemen (CEPA). Four copulas Gaussan suden Gumbel and Clayon are used o search for unnown dependence srucure changes. hs sudy presens wo man fndngs. Frs he dependence beween he Hong Kong and Chnese soc mares ncreased sgnfcanly followng he srucure change ha occurred on February 005 abou one year afer CEPA oo effec. Second he dsrbuon of dependence srucure alered from Gumbel copula before he srucure change o copula afer he srucure change. CEPA s effecs no only changed he dependence parameers bu also changed he dependence srucure s dsrbuon. JEL classfcaon numbers: G14 G15 F36 Keywords: economc negraon copula volaly srucure change dependence srucure change 1 Inroducon Snce end of he Uruguay Round of he General Agreemen on arffs and rade (GA) n 1993 many regons have progressed sgnfcanly owards achevng economc negraons. For example he Norh Amercan Free rade Agreemen(NAFA) negraed he Uned Saes Canada and Mexco no a free rade zone on January he Euro Zone negraed mos European counres no a sngle moneary unon on January In Asa many counres or economes have sgned free rade agreemens 1 Professor Deparmen of Managemen Scences amang Unversy awan. he correspondng auhor Ph.D. Program Deparmen of Managemen Scences amang Unversy awan. Lecurer Deparmen of Fnance Lunghwa Unversy of Scence and echnology awan. Address: No. 300 Sec. 1 Wanshou Rd. Gushan aoyuan Couny 333 awan. el: #645 Arcle Info: Receved : December Revsed : January Publshed onlne : March 1 014

2 34 Chung-Chu Chuang and Jeff.C. Lee (FA) wh Chna. hese nclude he Closer Economc Parnershp Arrangemen (CEPA) beween Hong Kong and Chna whch oo effec on January 1 004; he FA beween he Assocaon of Souheas Asan Naons (ASEAN) and Chna ha oo effec on January 1 010; and he Economc Cooperaon Framewor Agreemen (ECFA) beween awan and Chna ha oo effec on Sepember Blaeral or mullaeral economc negraons have grown n populary as hey lower arffs reduce rade barrers and boos rade and foregn drec nvesmen (FDI) among counerpares. Increased rade and FDI smulae demand for muual nvesmen among counerpares and furhermore change he dependence srucure beween her fnancal mares. In lnear regressons parameers are usually assumed o be sable.e. no srucure changes occur n he lnear regresson parameers. However n pracce parameer srucure changes n lnear regressons are ofen nfluenced by exogenous varables such as economc negraon. Some sudes concernng parameer srucure changes n regresson dvde he samples no wo subsamples o es he dfferences n he subsamples parameers. Oher sudes use a dummy varable o dsngush he sample s srucure change pon and es he sgnfcance of dummy varable parameer. radonally he parameer srucure change pon s assumed o be a nown facor n he samples such as he Chow es [1]. However he srucure change pon could be unnown ormore han one could exs n a se of samples. o deermne he rue pons of srucure change Donald and Andrew[] use he Wald es and lelhood rao es (LR) o es for he presence of unnown parameer srucure changes. Gombay and Horvah [3] propose a ess sasc and provde he crcal value by Mone Carlo smulaon under he LR framewor.ba[4] and Ba and Perron[5] use he leas squares mehod o es for he exsence of mulple srucure changes n a sample. For he dependence srucure change beween fnancal mares due o economc negraon many sudes assume hahe srucure change pon s nown for example Paon[6] Baram aylor and Wang[7] and Chung and Lee[8]. hese sudes assume ha he dae of economc negraon agreemens oo effec should be consdered he srucure change pon. However hs dae mgh no be he rue momen of he dependence srucure change. Das and Embrechs[9][10] and Manner and Candelon[11] followgombay and Horvahs concep [3] and es for unnown dependence srucure change pon usng he copula model. Economc negraon aes me o promoe rade and nvesmen among counerpares. herefore economc negraon mgh no mmedaely nfluence he dependence srucure among counerpares fnancal mares. If we consder he dae ha an agreemen aes effec o be he srucure change pon a pror he research resuls mgh dsplay bas. herefore hs sudy assumes ha he rue dependence srucure change pon s unnown. Followng hs assumpon hs sudy follows he sraegy of Ba [4] o denfy he volaly srucure change pons n a margnal model. o avod he nfluence of exreme evens we dscard volaly srucure change pons ha can be classfed as conagon by exreme evens n he Hong Kong and Chnese soc mares. Afer adopng volaly srucure changes excludng exreme even conagon hs sudy hen uses Aae Informaon Crera ( AIC ) o selec he bes f copula whch s used o denfy he dependence srucure change pon. Fnally hs sudy uses he denfed dependence srucure change pon o paron enre sample se no wo subsamples o cross-compare her dependence srucure dsrbuon. he major conrbuons n hs paper are frs our dscovery of he rue pon of he dependence srucure change beween he Hong Kong and Chnese soc mares. he dependence srucure change pon was denfed as beng abou one year afer CEPA

3 Economc Inegraon and Srucure Change n Soc Mare Dependence 35 oo effec on January Second our sraeges provde an addonal mehodology for searchng for unnown dependence srucure changes due o economc negraon. he res of he paper s organzed as follows. Secon revews he exsng leraure. Daa and emprcal mehod are demonsraedn Secon 3. Emprcal resuls are dsplayed n Secon 4. Our conclusons are offeredn Secon 5. Leraure Revew Economc negraon among regonal economes usually rggerschanges n soc mare dependence among counerpares. Asgharan and Nossman [1] found ha soc mare nerdependence can largely be assocaed wh economc negraon. hs upholds he wor of Phylas and Ravazzolo [13] who found ha Pacfc Rm counresexperenced ncreased fnancal mare negraon as a resul of economc negraon s radepromong effec. Johnson and Soenen [14] found ha Lan Amerca counres havng a hgh share of rade wh he Uned Saes also demonsrae a srong posve effec for soc mare comovemen.in all economc negraon can boos rade and nvesmen among counerpares and moreover change he dependence srucure among her soc mares. he soc mare dependence srucure change has a major mpac on fnancal nsuons asses allocaon and rs managemen. Some researches consder he dae ha economc negraonoffcally aes effec as he nown dependence srucure change pon and es s sgnfcance accordngly for example Paon [6] Barram aylor and Wang [7] and Chung and Lee [8]. However he soc mare dependence srucure change dae mgh be unnown raher han algnng perfecly wh he offcal economc negraon sar dae. When dealng wh an unnown change pon Ba [4] and Ba and Perron [5] provde a es sasc for srucure change usng he leas squares mehod n a lnear regresson model. Gombay and Horvah [3] also provde a es sasc under he lelhood rao framewor and provde crcal values usng he Mone Carlo smulaons. Furhermore Das and Embrechs [9][10] use Gombay s and Horvah s es sasc n a copula model and propose a sraegy o denfy a dependence srucure s change pon. However dfferen copulas mgh have dfferen dependence srucure change pons. herefore Callaul and Guegan [15]and Guegan and Zhang [16] sugges usng mnmum AIC o selec he bes f copula before esng for dependence srucure change o accommodae poenal dfference n change pon from dfferen copulas esmaon. 3 Daa and Emprcal Mehodology 3.1 Daa and Summary Sascs hs sudy uses he Hang Seng ndex and he Shangha Compose ndex o represen he Hong Kong and Chnese soc mares. Daly closng prces were colleced from January o December from Daasream.Afer excludng non-common radng daa a oal of 04 observaons were processed. able 1 repors he summary sascs for he Hong Kong and Chnese soc mares before and afer CEPA oo effec on January

4 36 Chung-Chu Chuang and Jeff.C. Lee able 1. Summary sascs Before CEPA Afer CEPA Whole perod Sascs (1999/1/6~003/1/30) (004/1/5~008/1/30) (1999/1/6~008/1/30) Hong Chna Hong Kong Chna Hong Chna Kong Kong Mean Sandard Devaon Sewness ** ** ** 0.068** Excess Kuross.1783** 5.657** **.5006** ** ** Q 6 3.3** 86.8** 877.8** 111.3** 945.9** 50.9** ( ) Jarque-Bera 00.7** ** 018.3** 66.8** ** ** Lnear Correlaon Noe: 1. **(*)denoes he sgnfcance a 1%(5%) level.. Q (6) s he 6-lag Ljung-Box sasc for he squared reurn. In all perods boh excess uross and Jarque-Bera show ha boh Hong Kong and Chnese soc mares possess heavy al and non-normal dsrbuons. Hong Kong demonsraes negave sew whereas Chna s s posve. he null hypohess of no auo correlaon s rejeced by he sgnfcance of Q ( 6) meanng ha he squared reurn s nonlnear. herefore hs sudy uses GJR GARCH o f boh soc mares. In addon he lnear correlaon ncreases from before CEPA o afer CEPA meanng ha he correlaon beween Hong Kong and Chnese soc mares soared afer CEPA oo effec. 3. Esmaon and es of he Margnal Model 3..1 Margnal Model wh Unnown Volaly Srucure Change hs sudy usesunvarae GJR GARCH (11) o capure volaly n he Hong Kong and Chnese soc mares. he model s defned as r µ ε = + c a1 1 b 1 a I 1 1 D 1 h z ~ v σ = + ε + σ + ε + γ () ε ψ = z (3) where r represens he log reurn for mare a me. = 1 sands for he Hong Kong and Chnese soc mares respecvely. Indcaon funcon I 1wll equal 1 when resduals ε 1 < 0 ; oherwse I 1 wll equal 0. he sandardze resduals z are assumed o follow he dsrbuon due o he lepourc characer wh degree of freedom υ. Dummy varable D s desgned o capure he volaly srucure change. I has an assumed value of 0 before volaly srucure change; oherwse s value s assumed o be 1. (1)

5 Economc Inegraon and Srucure Change n Soc Mare Dependence es for Volaly Srucure Change o es for volaly srucure change a q s o es he null hypohess and alernave hypohess as follows: H : σ = σ = σ = σ = = σ (4) 0 1 q 1 q H : σ = = σ σ = = σ. 1 1 q 1 q he es sasc under he null hypohess s Z 1< q< ( LRq) ( σ ) * ( * σ ) ( σ ) = max LRq = Lq q Lq q L + where ( ˆ ) L σ s he log lelhood for all samples. ( ˆ q q) * * ˆ q q lelhood for he frs q samples before srucure change. ( ) (5) (6) L σ s he log L σ s he log lelhood for he q+1 o samples afer srucure change. Z s he maxmumlog lelhood rao es. he larger he value of Z he hgher probably ha he null hypohess wll be rejeced. Gombay and Horvah [3] found under he condon as x and 0< h ( ) l ( ) < 1. When 3/ h ( ) = l ( ) = (log ) / he asympocdsrbuon probably of Z 1/ s PZ 1/ ( x) x p exp( x / ) p / Γ / ( p ) (1 h)(1 l) p (1 h)(1 l) 4 1 log log + + O 4 hl x hl x x (7) where p s he number of parameer changes under he alernave hypohess Mulple Volaly Srucure Change Adjusmen nhe Margnal Model Manner and Candelon[11] ndcaed fnancal mares can suffer from he conagon effec n he wae of he exreme evens. hs conagon effecs can creae volaly ha nfluences dependence srucure changes among soc mares. her model assumed he exsence of only one volaly change pon. However long-erm emprcal research has ndcaed he poenal exsence of mulplevolaly srucure change pons. o avod nfluence from exreme evens on dependence srucure changes hs sudy follows Ba s[4] suggesons. Frs we es for a sngle nal srucure change pon across he enre sample hen paron he samples no wo subsamples. Second wees boh subsamples o derve second and hrd change pons. Fnally we paron he wo subsamples no more subsamples unl no subsamples conan any sgnfcan srucure change pons. Afer esmang mulple volaly srucure change pons usng hemargnal model we dscard he change ponsclose o exreme evens and re-esmae

6 38 Chung-Chu Chuang and Jeff.C. Lee volaly srucure changesn he samples showng nfluenced from CEPA raher han exreme evens. 3.3 Condonal Copula he bvarae copula funcon combnes wo dfferen margnal dsrbuons here F( z1 ψ1 1 ) and G( z ψ 1) no a jon dsrbuon here Φ ( r1 r ψ 1 ). Accordng o Slar s heorem he jon condonal cumulave densy funcon (c.d.f.) s defned as ( ) ( 1 ψ 1 ) = ( ψ 1 ) = ( 1 ψ1 1 ) ( ψ 1 ) Φ r r C u v C F z G z where u = F( z1 ψ 1 ) and v G( z ψ 1) =. ψ 1 s he nformaon se a 1. he probably densy funcon (p.d.f.) of hs jon dsrbuon funcon can be decomposed as a produc of a copula p.d.f. and he wo margnal p.d.f.s: ( z1 z 1 ) = c( u v 1 ) f ( z1 1 1 ) g( z 1 ) ϕ ψ ψ ψ ψ g z ψ represen he margnal densy funcons for he Hong Kong and Chnese soc mares. Dsrbuon of dependence srucures exhb dfferen characers for dfferen copula densy funcons c( u v ψ 1). hs sudy uses four dsnc copula denses funcon o explore he dependence srucure change beween he Hong Kong and Chnese soc mares. he frs copula s a Gaussan copula whch possesses symmery bu shows very slm dependence on s al. Is densy funcon s where f ( z1 ψ1 1 ) and ( 1) c Gau ( u v ρ) ( ( u ) ( v ) ) ( u ) ( v ) ρ φ φ ρφ φ + = exp ( 1 ρ ) 1 ( ρ ) where ρ s he dependence parameer. he secondcopula s a Gumbel copula whch exhbs a hgh probably of rgh al dependence. Is densy funcon s c ( u v δ ) Gum 1 ( δ )( ) ( ) ( ) 1 Gau δ δ δ δ C u v ln u ln u ln u + ln v + δ 1 = 1 δ δ δ uv ( ln u) + ( ln v) where dependence parameer δ has a relaonshp wh endall δ = 1/ 1 τ. he hrd copula s a Clayon copula whch has a hgh probably on lef al dependence. Is τ of ( )

7 Economc Inegraon and Srucure Change n Soc Mare Dependence 39 densy funcon s c ( u v κ ) κ κ ( 1+ κ)( u + v 1) ( uv) 1 κ = Cla κ + 1 where dependence parameer κ has a relaonshp wh endall κ = τ /1 τ. he fourh copula s a copula whch has boh symmery and heavy al dependence. Is densy funcon s ( υ ) [ + /] υ+ υ 1 1 Γ 1 1 Γ + ψ Ω ψ υ cu ( v ρ υ) = [( υ+ 1 )/] 1 ρ 1 υ + 1 Γ 1+ ψ = 1 υ τ of ( ) where ρ s dependence parameer and υ s he degree of freedom( df..). o search for dependence srucure change arbue o CEPA hs sudy assumes τ as n he followng model ρ and ρ = ω+ λd (8) τ = ω+ λd (9) whereω and λ are parameers o be esmaed n he copula funcon. D s he dummy varable whose value s assumed o be 0 before dependence srucure change; oherwse wll be 1. However he exsence of dependence srucure change s assumed o be unnown and hus n need of esng. 3.4 Esmaon and es of Bvarae Dependence Srucure Change hs sudy uses boh he dependence parameer and dependence dsrbuon o confrm dependence srucure change beween he Hong Kong and Chnese soc mares can be arbued o CEPA. Frs hs sudy uses AIC o choose he bes f copula from he whole samples. Nex he chosen copula s used o denfy he dependence parameer srucure change pon followng CEPA s mplemenaon. Nex usng hs change pon we paron he enre sample no wo subsamples. Fnally four copulas are fed o boh subsamples o selec he bes f copula for each subsample.if he bes f copula shows aleraon before and afer dependence parameer srucure change he dsrbuon of he dependence srucure s changed.

8 40 Chung-Chu Chuang and Jeff.C. Lee he AIC In researches on condonal copula dependence he copula funcon s usually assumed o be unchanged. However he daa s dsrbuon srucure mgh be changed for a dfferen me perod. herefore he bes f copula should be denfed before beng used o es he dependence srucure. Callaul and Guegan [15] and Guegan and Zhang [16]sugges usng AIC o choose he bes f copula. AIC s defned as ( ˆ θε) AIC = L ; + r (10) where L ( ˆ; θε ) s he copula log lelhood. ε s he resdual. ˆ θ are he copula s esmaed parameers. In he Gaussan copula he Gumbel copula and he Clayon copula he esmaed parameers are ρ δ and κ respecvely. In he copula he esmaed parameer are ρ and υ. r s he number of esmaed parameers n he copula. hs sudy wll choose as bes f he copula exhbng he lowes AIC value es of Dependence Srucure Change hs sudy follows he mehod of Gombay and Horvah [3] and Das and Embrechs [10] o denfy unnown dependence srucure change pons. Leu 1u u be he sequence of an ndependen random vecor wh unformly dsrbued margns and a copula of C ( u 1; θ1 η1) C ( u ; θ η) C ( u ; θ η) respecvely where θ 1 and η (1) () are he copula s parameers and θ Θ η Θ. Assumng parameer η ( = 1 ) s consan esng f he dependence parameer has a sngle srucure change pon condonalupon a sngle volaly srucure change s equal o esng he null hypohess whch s H0 : θ1 = θ = = θ = θ condonal o σ = = σ σ = = σ and η = η = = η = η 1 q q+ 1 1 and esng he alernave hypohess whch s H θ θ θ θ θ condonal o 1: 1 = = * * = * = = = q 1 q = = and 1 = = = =. σ σ σ σ η η η η (11) If H 0 s rejeced rao es( LR ) s defned as * s he srucure change pon. If * = s nown he lelhood sup ( 1) ( ) c( u ; θ ) ( ) 1 η θ η Θ Θ Λ = sup c( u ; θ η ) c( u ; ς η ) ( 1) ( 1) ( ) Θ Θ Θ ( θ ς η ) 1 <. (1)

9 Economc Inegraon and Srucure Change n Soc Mare Dependence 41 Λ s small he null hypohess wll be rejeced easly. Gven he copula p.d.f. c When he esmae of L L * Λ can be esmaed usng he followng wo equaons: ( θη) c( θη) = log u ; (13) 1 < ( θη) c( θη) = log u ; (14) where ( ) * ( ) L θη s he maxmum log lelhood esmae for samples = 1 1and L θη s he maxmum log lelhood esmae for samples =.herefore he es for asympoc dsrbuon of LR s ( ˆ θ ˆ η ) ( ) ( ) * ˆ θ * ˆ η ˆ θ ˆ η log( Λ ) = L + L L where ˆ * θ and ˆ θ represen parameer esmaes before and afer srucure change pon respecvely. ˆ θ and ˆ η are he copula parameer esmaes for he enre samples.if s unnown hs sudy uses a grd search o deermne he maxmum Z and denfy he dependence srucure change pon. Z s defned as (15) Z 1< < ( ( ) ) = max log Λ. (16) When he general condonal holds he smaller he value of Λ he larger he value of Z and he easer wll be o rejec he null hypohess. he p value for asympoc 1/ dsrbuon of Z can be calculaed by equaon (7). 4 Emprcal Resuls 4.1 Margnal Model hs sudy follows (Ba 1997) o denfy he nal volaly srucure change pon for he enre sample n wo margnal models. Afer paronng he enre samples no wo subsamples by usng he nal change pon hs sudy ess he volaly srucure change pon n boh subsamples unl no subsample conans a sgnfcan volaly srucure change pon. able shows he resuls for he Hong Kong and Chnese soc mares. he Hong Kong soc mare has hree volaly change pons bu he Chnese soc mare has only one.

10 4 Chung-Chu Chuang and Jeff.C. Lee able : Change pons for margnal models Paron Perod 1/ Z p value H Dae of 0 Change I 1999/1/6~008/1/ Rejec 007/6/6 II 1999/1/6~007/6/ Rejec 001/1/1 Hong Kong III 007/6/7~008/1/ /1/6~001/1/ NoRejec No Rejec 001/1/~007/6/ Rejec 004/6/15 IV 001/1/1~004/6/15 No Rejec 004/6/16~007/6/ No Rejec I 1999/1/6~008/1/ Rejec 006//11/8 Chna II 1999/1/6~006/11/8 006/11/9~008/1/ No Rejec No Rejec Noe: 1.he sgnfcan level s 0.05;.he forma for dae of change s year/monh/day n sequence. he volaly srucure change pons of June and December n he Hong Kong soc mare are near he subprme morgage crss n 007and he 9/11 wn ower bombng n 001. o avod nfluence from such exreme evens on he esmaon of dependence srucure change he volaly srucure change pons of June and November are chosen for he Hong Kong and Chnese soc mares respecvely. he margnal model s esmaon resuls are shown n able 3. Mos esmaed parameers are sgnfcan and comply wh he model s resrcons of c > 0 a 1 > 0 b > 0 and a1 + b < 1. he sgnfcance of γ ndcaes ha he volaly srucure changes of he Hong Kong and Chnese soc mares are sgnfcan afer June and November respecvely. able 3: Parameer esmaes for margnal models Parameers Hong Kong Chna µ 0.036** (0.01) (0.0164) c ** (0.0178) (0.0086) a ** 1 (0.097) (0.011) b ** ** (0.0568) (0.0319) a (0.0448) (0.0365) γ ** * (0.0015) (0.011) v ** ** (0.6067) (0.635) Dae of 004/6/15 006/11/8 Volaly change Log-lelhood Noe: 1.**(*)denoes he sascal sgnfcance a 1%(5%) level;.numbers n parenheses are sandard errors excep for γ.he number n parenheses for γ s he p value from equaon (7); 3.he forma for dae of volaly change s year/monh/day n sequence.

11 Economc Inegraon and Srucure Change n Soc Mare Dependence Bes F Copula hs sudy uses he enre sample o choose he copula as bes f copula he one havng mnmum AIC. able 4 shows he resuls of esmaed parameers and he AIC value for he four sac copulas durng he me perod December o June I can be seen ha he copula has he mnmum AIC value of herefore hs sudy chooses he copula as he bes f copula o denfy he unnown dependence srucure change pon. able 4: Copula seleced by AIC for he whole perod Copula model Dependence df.. AIC Gaussan ** (0.086) ** 15.48** (0.030) (0.1971) Gumbel ** -6. (0.0177) Clayon ** (0.0170) Noe: 1. Parameers of dependence and d.f. are derved from a sac copula.. **(*)denoes he sgnfcance a 1%(5%) level. 3. Numbers n parenheses are sandard errors. 4. he boldface number n he AIC column ndcaes he bes f copula funcon. 4.3 Esmaon and es of Dependence Srucure Change he resuls of he parameer esmaon are shown n able 5. 3 All parameers are sgnfcan and rejec he null hypohess ha dependence srucure dd no change. he dae of dependence srucure change beween he Hong Kong and Chnese soc mare has been denfed as February 005 whch s around one year afer CEPA formally oo effec. hsyear-long delay of dependence srucure change could be arbuable o he fac arff reducons or muual nvesmens were elgble only afer CEPA oo full effec. herefore CEPA s full mpac was delayed. he mos noceable parameer s λ. I s value s 0.71 means ha dependence ncreased by 7.1% followng he dependence srucure change on February We also esmaed dependence srucure change for he enre sample beween January and December he dae of change s February 005 he same as n able 5. he esmae of λ s and df.. s Z s All parameers are sgnfcan a he 0.05 level. 1/

12 44 Chung-Chu Chuang and Jeff.C. Lee able 5: Parameer esmaes and hypohess es for change pon perod ω λ df.. 1/ Z p value Dae of Change copula 001/1/~ 007/6/ * (0.044) 0.71** (0.065) 4.8** (0.57) // Noe: 1. **(*)denoes he sgnfcance a 1%(5%) level..numbers n parenheses are sandard errors. Afer denfyng he dependence srucure change pon he enre sample s paroned no wo subsamples by hs change pon. AIC s once agan employed o choose he bes f copula for each subsample. he resuls of hs es for bes f copula are presened n able 6.he bes f copula for each subsample s dfferen. Before srucure change he Gumbel copula was he bes f bu afer he change pon he copula became he bes f.he change of he bes f copula mples a change n he dsrbuon of dependence srucure. Before he srucure change dependence s more correlaed on he dsrbuon s rgh sde whereas followng he srucure change s equally correlaed on boh sdes. In oher words before February 005 he Hong Kong and Chnese soc mares were more correlaed when boh mares are soared bu afer February 005 hey showed equal correlaon when boh mares eher soared or dove. In sum CEPA s mpac no only caused he dependence parameers beween he Hong Kong and Chnese soc mares o change bu also cause he dsrbuon of her dependence srucure o change as well. able 6: es for change-pon under dfferen copula funcon Sample Sze me Inerval Mnmum AIC Dae of Change I /1/7~007/6/ // II /1/7~005// //~007/6/ Noe: 1.he forma for dae of change s year/monh/day n sequence. Bes F Copula Gumbel 5 Conclusons hs sudy has wo major fndngs. Frs CEPA caused ncreased dependence beween he Hong Kong and Chnese soc mares. Dependence ncreased abou 7.1% afer srucure change whch hs sudy deermned occurred on February 005 roughly one year afer CEPA oo effec. Second he dsrbuon of he dependence srucure also changed from he Gumbel copula before srucure change o he copula afer srucure change. hs resul mples ha he Hong Kong and Chnese soc mares show more correlaon before February 005 when boh mare soared bu exhbed equal correlaon for soarng or dvng afer February 005.hese wo fndngs agree wh he resuls of Phylas and Ravazzolo [13] and Johnson and Soenen[14]. In hese sudes soc mare dependence ncrease among economc negraon counerpares could be arbuedo hepromoon of radng and muual nvesmen. As hose ams are Hong Kong s and Chna s orgnal nenons for sgnng CEPA hs sudy also can conclude ha CEPA appears o have produced s nended effec.

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