First and second order instability of the Shanghai and Shenzhen share price indices

Abstract

First and second order instability tests are applied to China's two major share market price indices (SPIs), Shanghai share market price index (SES) and Shenzhen share market price index (SZS) using daily data from 2 January 1992 to 16 July 2004. First order instability is synonymous with non stationarity and second order instability with structural breaks. Applying procedures developed by Perron (1997) and Zivot and Andrews (1992), it is found that both share price indices are unstable in the first and second order. The Shanghai series breaks in December 1999 and Shenzhen in May 1999. Existence of the share A (domestic listing) and share B (foreign listing) seem to buffer both markets against the worst effects of the Asian Crisis and September 11 attack. These shocks were apparently absorbed by the foreign listings of shares.