Effect of the Shenzhen-Hong Kong stock connect mechanism on stock market volatility.

The Shenzhen-Hong Kong Stock Connect (SHSC) mechanism has created the largest two-way opening of the China capital market, but it has also increased risk transmission. To analyze the impact of SHSC on the volatility of a single market in Shenzhen or Hong Kong, this paper establishes the volatility models of stock markets in Shenzhen and Hong Kong based on the Generalized Auto-Regressive Conditional Heteroscedasticity (GARCH) type models with different perturbation terms. The preapplicable test is made and the result shows that the return rate series of Shenzhen and Hong Kong stock markets are stable and heteroscedastic, and they meet the conditions of establishing the GARCH-type models. Then, the GARCH model and EGARCH model are established to analyze the volatility of stock markets in Shenzhen and Hong Kong, respectively. The results show that the opening of SHSC has increased the short-term volatility of the stock markets in Shenzhen and Hong Kong and improved the efficiency of information transmission between these two stock markets. Furthermore, the leverage effect of the Shenzhen stock market is expanding under the effect of SHSC, but the leverage effect of the Hong Kong stock market is decreasing. [ABSTRACT FROM AUTHOR]