Investigation of non-linear granger causality between China mainland stock market and Hong Kong H-share market

In this paper we investigate the linear and non-linear causality relationship between mainland China stock market and Hong Kong H-share market over January 1994-December 2007 period, which is divided into four periods marked by Asian financial crisis in 1997 and the opening of Chinapsilas B-shares to domestic investors in 2001, as well as by split-share structure reform in 2005. Nonlinear Granger causality testing proposed by Himestra and Jones (1994) has been used and a new Monte-Carlo simulation method was induced to calculate the confidence level. The results of non-linear causality tests show that there exists non-linear causality between the two markets during the sample period. However, this causality relationship varies in different periods, which can not been seen from the linear test results.