Market Segmentation and Information Diffusion in China's Stock Markets: Panel Data Unit Root and Cointegration Tests on A and B Share Prices

Abstract

This paper studies market segmentation, information asymmetry and diffusion on the Chinese stock exchanges. Previous studies indicate that the price difference between domestic investors' A shares and foreign investors' B shares are driven by a stochastic trend. In this paper we test the stationarity of the A share price premium, and cointegration between A and B share prices using panel data methods. We use standard Augmented Dickey-Fuller (ADF) unit root tests and likelihood ratio (LR) tests for cointegration for the cross-sectional units or individual firms. Our panel data tests are based on the Fisher (1932) test suggested by Maddala and Wu (1999), i.e. the tests are based on combining the individual p-values from the cross-sectional units or firms. Using panel data, we find that the A share price premium is stationary, and we find cointegration between A and B share prices for most firms, but not for all. A probit model is used to identify the firm characteristics that determine whether A and B share prices cointegrate or not. The results show that cointegration is more likely to be found for firms that have listed their B shares in more recent years, and for firms in the service and manufacturing sectors.