The dynamic impact of bilateral trade linkages on stock market correlations of Australia and China

This article aims to examine the long-run equilibrium relationship between bilateral trade

linkages and stock market correlations of Australia and China using quarterly data from 1993

to 2015. Further, this study explores the impact of trade intensity on stock market correlations

using OLS, Dynamic OLS (DOLS) and Fully Modified OLS (FMOLS) models. The empirical results

confirm that there is a significant long-run relationship among the variables. In addition, our

results, based on OLS, DOLS and FMOLS, show that increasing trade intensity between Australia

and China has a significant and positive impact on their stock market correlations. The Global

Financial Crisis also contributed for their stock market interdependence. Our results therefore

suggest that the bilateral trade relations between Australia and China have brought their stock

markets together over time. The findings of this study offer significant policy and practical

implications. The policymakers need to be aware of the economic changes in those countries

as they will immediately reflect on their stock market performance and relationship. Similarly, the

global investors need to be aware of the fact that the diversification opportunities between

Australia and China have considerably declined over time as their markets became more interdependent

in the recent past.