Correlation analysis of stock markets in the Belt and Road regions

Abstract

Asa regional cooperation framework, the Belt and Road Initiative (BRI) aims to spureconomic development by investing in infrastructure and improvingconnectivity between countries in Asia, Europe, and Africa locatedalong the Silk Road Economic Belt and the 21stCentury Maritime Silk Road. Many studies have documentedthat BRI-related investmentprojects reduce trade costs, increase trade and investment flows, bringbenefits to trading parities, andimproveconnectivity between countriesalong the Belt and Road. Financial integrationis a criticalaspect of intangible connectivity that is fundamental to and benefits from increasedtrade and investment flows between countries. This studyexaminesthe pair-wise correlations between 39 stock markets in the Belt and Road regions from 2008 to 2018, focusingon the correlations between China and the other markets. We find that the correlation between two markets in the same region is greater than thoseindifferent regions. China has ahigher correlation with markets in Southeast Asia and North andCentral Asia than inother regions. The correlations fluctuate over time,but theirrelative rankings amongmarket pairs remain stable. In the first half of 2015, there was an unusually low correlation between China and all other markets, mostlikely due to China’sstock market bubble.Oursystematic examinationof stock market correlations in the Belt and Road regions sheds new light on the temporal and cross-sectional dynamics in these understudied financial markets.Thefindings suggest significantpotential for financial integration in the Belt and Road regions.