Capital account liberalization and dynamic price discovery: evidence from Chinese cross-listed stocks

Abstract

We analyze the effects of a recent financial reform that enables cross-market investment between Hong Kong and Shanghai stock exchanges. Using a vector error-correction model, we find that the reform announcement considerably narrows the equilibrium level of price disparity and strengthens the price comovement of shares that are cross-listed in both markets. First, there is a substantial increase in the number of cross-listed firms with cointegrated share prices, and the estimated equilibrium relationship is in support of the relative law of one price. Second, our model predicts that the price disparity narrows by as much as 40 percent in equilibrium. Third, we find that both markets adjust in response to a disequilibrium in price disparity, leading to a sizable error-correction activity. The Shanghai market contributes to approximately two-thirds of the price discovery process.Competition and informativeness of trading affect the relative role of price discovery in each market.

Premiums between Cross‐listed Shares: Determinants and Assessment of Financial Reform Policy Effectiveness

“…Table 3 shows that the dummy variable D SH_connect has negative and significant impacts on A-H premium (more economically significant for the nine companies), implying that S-H Connect has improved price parity in the two stock markets. It adds to the fi ndings of existing studies, which explain the jump in the A-H premium index in December 2014 as mainly driven by systematic shifts in the US dollar index, market sentiment, and other factors (Chan and Kwok, 2015;Nishimura et al, 2018).…”

“…In recent years, the impacts of S-H Connect on the A-H premium have received much attention. Chan and Kwok (2015) and Nishimura et al (2018) find that S-H Connect has enhanced the price discovery capacity of A and H shares. Earlier studies focused more on the impacts of S-H Connect on capital fl ow and market connectivity.…”

“…Burdekin and Siklos (2018) and Lu et al (2018) provided evidence that impacts of capital fl ow through S-H Connect on A-H premium are insignifi cant. Although following the introduction of S-H Connect, the relationship between the indices of the two markets and the correlations of individual share prices have been enhanced, the connectivity of the two markets has not (Chan and Kwok, 2015;Ma et al, 2019). Lu et al (2018) found that S-H Connect increased the A-H premium in the short run but reduced it in the long run.…”

Effects of cross‐border capital flows on stock returns of dual‐listed firms in mainland China and Hong Kong: Evidence from a natural experiment

“…This paper is related to works that examine the effect of SHSC policy on the stock market (Bai, Yan, & Chow, 2017;Burdekin & Siklos, 2018;Chan & Kwok, 2016, 2017Huo & Ahmed, 2017;Lin, 2017). Chan and Kwok (2016) use a vector error correction model and find that the SHSC policy announcement strengthens the price comovement of shares cross-listed in both markets. Moreover, Chan and Kwok (2017) find a price revaluation of the mutual holding stocks after the SHSC policy.…”

Quantifying the impact of the November 2014 Shanghai-Hong Kong Stock Connect

“…But their findings of overall price convergence rely upon the use of the cross-listed Shenzhen-Hong Kong shares as a "treatment" group, which seems questionable given that the Shenzhen-listed companies are typically smaller, as well as being more tech-focused, than those listed in Shanghai -leaving the book values of Jiang and Sohn's Shanghai-Hong Kong pairs substantially higher than the book values of their Shenzhen-Hong Kong pairs. Chan and Kwok (2016) Unlike the extant work, our analysis of the A-H Share premium incorporates data on the daily fluctuations in actual Northbound and Southbound flows. These observations were not used previously.…”