Which Chinese Markets to Diversify into?

This paper investigates the correlation and feedback relationships between the Hong Kong Hang Seng Index (HSI), the Hang Seng Chinese Enterprise Index (CEI) and the S&P 500 Index (SP). We divide the indexes into two separate periods, from the inception of the CEI in 1994 to the stock market crash in 2000, and from 2001 to 2011. Our results show that the feedback relationship between the CEI and the SP is stronger after 2000. As the feedback relationship grows stronger, the diversification benefit reduces for US investors who utilizes the CEI as a tool for diversifying into Chinese markets.