Financial interdependence between Hong Kong and the US: A band spectrum approach

In this paper, we study causal relationship between Hong Kong and US financial markets, using band spectrum regression techniques that allow us to examine the dynamic properties of the interactions between capital markets. By decomposing the variations of financial markets into different frequency movements, we determine that before the Asian financial crisis there is a feedback relationship between the two markets which is driven by long cycles (with low frequencies). For the post-crisis and post-911 periods, there is a one-way causality from the US market to the Hong Kong market. Moreover, short cycles (with high frequencies) are responsible for this dynamic relationship.