This study investigates dependence structure
changes between the Hong Kong and Chinese stock markets as a result of the
Closer Economic Partnership Arrangement (CEPA). Four copulas, Gaussian, student
t, Gumbel, and Clayton are used to search for unknown dependence structure
changes. This study presents two main findings. First, the dependence between
the Hong Kong and Chinese stock markets increased significantly following the
structure change that occurred on February2, 2005, about one year after CEPA
took effect. Second, the distribution of dependence structure altered from Gumbel
copula before the structure change to t copula after the structure change.
CEPA’s effects not only changed the dependence parameters but also changed the
dependence structure’s distribution.