Abstract
This paper was intended to examine factors influencing the correlations between A- and B-shares of individual firms, and explore the effects of Qualified Foreign Institutional Investor’s (QFII) implementation on correlations. The empirical results show that interest rate differential, relative turnover rate, relative return volatility, and market sentiment had impacts on correlation both before and after the QFII’s implementation. After its implementation, correlations became more sensitive to premium, relative turnover rate and market sentiment. Furthermore, the estimated constant term for overall market correlation became more negative (raw values from -0.3413 to -0.8815), indicating an increasing correlation between A- and B-shares’ returns. The policy implications are that much benefit of diversification into emerging markets such as paired A-and B-shares can be accomplished, together with taking several influential factors into account.
Highlights
Both the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) were set up in December 1990 and April 1991, respectively
The first capital inflow of Swiss Bank Corporation into the A-share market was traded on July 9, 2003, the date the Qualified Foreign Institutional Investor (QFII) scheme was officially brought into effect; we viewed July 2003 as the dividing point
Except for the S&P 500 index, which was collected from DataStream, all other data were collected from the Taiwan Economic Journal (TEJ) database
Summary
Both the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) were set up in December 1990 and April 1991, respectively. International investment wisdom suggests that interactions between assets are significant factors to be considered when managing diversification In this light, re-examination of the effects of the Qualified Foreign Institutional Investor (QFII) program on the correlations of A- and B-share returns is warranted. The estimated constant term for overall correlation became more negative (raw values from -0.3413 to -0.8815), indicating an increasing correlation between A- and B-share returns It implies that benefit of diversification into emerging markets such as paired A-and B-shares can be accomplished and that the above-mentioned factors need to be carefully considered when dealing with international investment.
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