1. Comments on “Hong Kong’s Financial Market Interactions with the U.S. and Mainland China in Crisis and Tranquil Times” Discussed by Qing Liu SEM, Tsinghua University June 26, 2009

2. Motivation The financial markets in HK have been highly correlated with US markets In recent years, more integration with Mainland economy Q: How financial markets in HK respond to shocks in US and Mainland markets?

3. Method VAR model The burst of IT bubble (Jan. 2, 2001- Dec. 31, 2001) Current crisis period (Aug. 9, 2007 – Apr. 4, 2009) The tranquil period (Jan. 2, 2002 – Aug. 8, 2007) A broad range of financial markets are included 3 Equity markets 3 money markets US bond markets and US$/HK$ FX markets

4. Main Results Equity market The influence of the Mainland equity market is increasing The influence of the US equity market is still more important Money market HIBOR and LIBOR move together in crisis Repo rate in Mainland does not affect HIBOR FX market Before the crisis, HK exchange rate was affected by fund flows related to money and equity market in HK During the crisis, Hang Seng index is not significant any more

5. Robustness of Assumptions on the Identification of VAR Mainland markets could affect the HK markets on the same day, but not the other way around The equity market affects the interest on the same day, but the interest rate affects the equity market with one day lag All market can affect the exchange rate on the same day, but exchange rate affect other markets with a one- day lag

6. H-share Stocks Shocks from US equity market affect H-share stocks more than they affect the stocks for HK companies during the current crisis Need a story How about the other periods? The impact from Mainland equity market become important to HK stocks in this crisis Weight of H-share stock or crisis?

7. Money and FX markets HIBOR and LIBOR are correlated in crisis, but the correlation is higher in the IT bubble burst What’s the difference between the two crisis Equity markets are not significant in the HK dollar exchange rate equation during the crisis periods Equity related capital outflows as well as inflows related to “flight to safety” purpose Data?

8. Extend Data Period? Now The burst of IT bubble (Jan. 2, 2001- Dec. 31, 2001) The tranquil period (Jan. 2, 2002 – Aug. 8, 2007) Current period (Aug. 9, 2007 – Apr. 4, 2009) Another tranquil period before the burst of IT bubble The tranquil period (Jan. 2, 1999 – Dec. 31, 2007)