Testing for relationships between Shanghai and Shenzhen stock markets: A threshold cointegration perspective

We investigate the relationships between Shanghai and Shenzhen stock market, and reveal the evidence of cross-correlations between the two stock markets. Our main findings show that Shanghai and Shenzhen stock market are cointegrated, and also present the evidence of strong error-correction effect in the short-rate equation, whereas the point estimate for the error-correction term is small and not statistical significance in the long-rate equation. Finally, Shanghai stock market ECT coefficient shows the evidence of long-term equilibrium in the first regime, while in the second regime the coefficient of correction term is larger than that of the first regime, indicating the rate convergence to long-term equilibrium is not uniform.