Market Segmentation, Price Disparity, and Transmission of Pricing Information: Evidence from Class A and H Shares of Chinese Dual-Listed Companies

Kyung-Won Kim,Yong Hyeon Kim,Hong-Ghi Min,Chul W Park

doi:10.4236/jfrm.2015.43011

Kyung-Won Kim, Yong Hyeon Kim + Show 2 more

Open Access

https://doi.org/10.4236/jfrm.2015.43011

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Abstract

This paper examines the transmission of pricing information and the volatility of dual-listed stocks between class A and H shares of Chinese companies. First, using firm level data, we show that there is a large price discount for H shares relative to the A shares. Second, when we divide the firms into a high price disparity group and a low price disparity group, we find that the high price disparity group’s pricing information transmission is stronger than the low price disparity group during the pre-liberalization period (in terms of significant mean coefficients). Third, when we divide the entire sample period into a pre-liberalization period and a post-liberalization, we find that the mean value spillover is stronger during the post-liberalization period for the low price disparity group. Finally, we report that during the post-liberalization period, the volatility spillover increases from A shares to H shares while it decreases from H shares to A shares. This implies that there is an information advantage of H shares, disappearing with the liberalization of A shares.

Highlights

In many emerging countries, stock markets are segmented to allow companies to issue shares that attract foreign funds while minimizing the risk of market destabilization and loss of ownership control to foreign investors
Some firms issue two types of shares in China: class A shares which are quoted in Renminbi (RMB) and traded among Chinese citizens, and class B shares which are quoted in foreign currencies (U.S dollars on the Shanghai Stock Exchange (SHSE) and Hong Kong dollars on the Shenzhen Stock Exchange (SZSE)) and traded among non-Chinese citizens or overseas Chinese
The Autoregressive Conditional Heteroscedasticity (ARCH) model introduced by Engle (1982) and the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model developed by Bollerslev (1986) are believed to be suitable to analyze time series data in order to handle these problems

Summary

Introduction

Stock markets are segmented to allow companies to issue shares that attract foreign funds while minimizing the risk of market destabilization and loss of ownership control to foreign investors. Before the opening of the B share market to local Chinese investors, the B share and H share price discounts remained at a similar level. We believe that the liberalization reforms impacted the price disparity and transmission of pricing information between the Chinese market and Hong Kong market. Most of the previous studies have examined the transmission of pricing information at the level of the stock market index. This study compared the different transmission of pricing information during the pre-liberalization period and the post-liberalization period between A share and H share markets. The current study employed the GJR-GARCH model to examine the spillover effect more precisely

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