Correlation Analysis of Stock Markets in the Belt and Road Regions

Abstract

As a regional cooperation framework, the Belt and Road Initiative (BRI) aims to spur economic development by investing in infrastructure and improving connectivity between the countries in Asia, Europe, and Africa located along the Silk Road Economic Belt and the 21st Century Maritime Silk Road. Many studies have documented that BRI-related investment projects reduce trade costs, increase trade and investment flows, bring benefits to trading parties, and improve connectivity between countries along the Belt and Road. Financial integration is a critical aspect of intangible connectivity that is fundamental to and benefits from increased trade and investment flows between countries. This study examines the pairwise correlations between 39 stock markets in the Belt and Road regions from 2008 to 2018, focusing on the correlations between China and the other markets. We find that the correlation between two markets in the same region is greater than those in different regions. China has a higher correlation with markets in Southeast Asia and North and Central Asia than in other regions. The correlations fluctuate over time, but their relative rankings among market pairs remain stable. In the first half of 2015, there was an unusually low correlation between China and all other markets, most likely due to China’s stock market bubble. Our systematic examination of stock market correlations in the Belt and Road regions sheds new light on the temporal and cross-sectional dynamics in these understudied financial markets. The findings suggest significant potential for financial integration in the Belt and Road regions.