Financial liberalisation and international market interdependence: Evidence from China’s stock market in the post-WTO accession period

• We measure the degree of stock market interdependence between China and the world.
• We employ the multi-factor R-squared measure and develop a normalized index.
• We find that China’s financial liberalization has greatly increased international stock market interdependence in the post-WTO accession period.
• Apart from financial liberalization, China’s economy overheating in 2007 and its economic stimulus plan in 2008–2009 might have also influenced international stock market interdependence significantly.
• Market overreaction might have contributed greatly to the sudden rising-up of market interdependence in particular cases.

This paper studies China’s stock market with respect to financial liberalization and international market interdependence after its accession to the WTO in 2001. Using the multi-factor R-squared measure, we derive a normalized index to measure the impact of financial liberalization policies on stock market interdependence between China and the world. Some of China’s financial liberalization measures, such as QFII and exchange rate reform, are found to have played an important role in increasing market interdependence. After the US credit crunch in 2007 and the world financial crisis in the following years, some anomalies were observed as China’s stock market was more interdependent of the global market than the US stock market in some specific periods. These anomalies may have been related to the former’s overreaction and economic overheating.