The Price Linkages between the Equity Fund Price Levels and the Stock Markets : Evidences from Cointegration Approach and Causality Analysis of Hong Kong Mandatory Provident Fund (MPF)

This paper is the first study to examine the short and long term price level linkages between the equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme and the benchmark indices proxied by different indices designed by the Hong Kong Investment Fund Association (HKIFA) over the period 2001 – 2008. Cointegration test is used to identify the long run relationship between the price levels and the stock market index, short run relationship between them is analyzed by the Granger causality test. We find that there is 56.43% of the equity funds have their price levels cointegrated with stock market index. In the short run, the Granger causality test indicates that some funds' price levels have both long and short run comovements with the stock market indices; on the other hand, some equity funds are found to have short run comovements with the stock market index but no long run comovements with the index, this indicates that some equity fund managers have ever tried to design their portfolios trying to win the market. Cointegration analysis is also done to investigate the long run relationship between the price levels of non-Hong Kong equity fund price levels and the local stock market index, Hang Seng Index, to evaluate the existence of benefit from global diversification by investing in the foreign equity funds. The results indicate that the scheme participants may have global diversification benefit by investing in US and Japanese equity funds