Correlation between Hang Seng Index and Other Indices

After my last post of correlation between VIX and some major indices, many of my blog readers show great interest in the topic. In this post, I will study the correlation between Hang Seng Index (HSI) and other major indices. As a common sense, the most influential indices to Hang Seng Index should be indices of US stock market and indices of China stock market. In such case, I have selected S&P500, NASDAQ (NQ) , SSE Composite Index (SHC) and Hang Seng Chinese Enterprise Index (HHI) as a reference for the correlation study. The correlation coefficients between HSI with these four indices are calculated based on the daily close of each index from 3rd Jan, 2005 to 31st Oct, 2008. The results are as below :

1. S&P500 with HSI : 0.76

2. NQ with HSI : 0.82

3. HHI with HSI : 0.99

4. SHC with HSI : 0.93

My Findngs :

1. SHC has a higher correlation with HSI than S&P500 and NQ which reflects the fact that more and more chinese enterprises are selected as components of HSI and the chinese economy is now more influential to the economy of Hong Kong.

2. To my surprise, NQ is more correlated to HSI that S&P500. The reason behind may be quite interesting to study.

3. The correlation between HHI and HSI is very high which is very predictable as these two indices are in the same stock market and share some common components.

Some poeple may raise the question : "How about the US stock market and Chinese stock market?" I also calculated the correlation coefficient between S&P500 and SHC. The result is positive with a correlation coefficient of 0.76.