Modeling volatility linkages between Shanghai and Hong Kong stock markets before and after the connect program

Based upon ARMA-t-BEKK-AGARCH models, this paper investigates the volatility linkages between Shanghai and Hong Kong stock market before and after the Program. Shocks spillover is found to be unidirectional from Hong Kong to Shanghai market before the Program and after the Program. Volatility transmission persistence bears the major change of volatility linkage between the two markets; it changes from being significantly bidirectional before the Program to be insignificant thereafter. Asymmetries of shocks spillover are also identified between the two markets both before and after the Program. Dynamic conditional variance and covariance matrices are examined and used to construct hedge ratios and portfolio weights. Finally, correspondent suggestions are given for investors and policy makers.