Abstract
Purpose: This study examines how, and to what extent the trading of the cross-listed China-backed ADRs on the New York Stock Exchange (NYSE) contributes to the information flow and price discovery for the corresponding cross-listed stocks on the Shanghai Stock exchange (SSE). Design/methodology/approach: The study utilizes the information share, Granger causality test, Vector error correction model, Permanent–Temporary Gonzalo–Granger (PT/GG) method and Bivariate DCC-EGARCH model to examine the price discovery dynamics across the cross-listed stocks. Findings: The Granger causality tests show that there is two-way transmission on feedback between the Chinese and US markets. The effects from NYSE to SSE are larger than the other way round. The Bivariate DCC-EGARCH model test results indicate the volatility spill over from NYSE is larger from the SSE. Practical implications: Results suggest that in contrast to previous studies that showed very little contribution to price discovery by Chinese ADRs on the NYSE, the present study indicates that the contribution to price-discovery of Chinese ADRs on NYSE has increased relative to the past, suggesting the importance of changing time frames and economic situations. Originality/value: The study differentiates between long-term and short-term price discovery effects and finds that home country bias persists in the long term and in the short term the information from the Cross-listed China-backed ADRs on the New York Stock Exchange (NYSE) affects price discovery for SSE stocks.
Highlights
The rapid development of world economic integration and financial liberalization has provided companies with an opportunity to list their shares on multiple stock exchanges i.e. cross-listing
Using a sample of nine companies, this study examines how, and to what extent the trading of the China-backed ADRs cross-listed on the New York Stock Exchange (NYSE) contribute to the information flow and price discovery for the corresponding cross-listed stocks in Shanghai Stock exchange (SSE)
We found that the returns of the two pairs that are cross-listed on NYSE and SSE stocks are co-integrated in the long-run across the two markets in most of the cases, indicating both an absence of arbitrage opportunities and long-term equilibrium
Summary
The rapid development of world economic integration and financial liberalization has provided companies with an opportunity to list their shares on multiple stock exchanges i.e. cross-listing. Frijns et al (2010) examined the price discovery of bilaterally cross-listed stocks in the Australian and New Zealand exchanges, and found that in both cases the home market is dominant in terms of price discovery They observe that as firms grow larger and their cost of trading in Australia declines, the Australian market becomes more informative. Chen et al (2016), investigated the impact of short selling and margin trading on the price discovery and price informativeness of cross-listed firms, using a sample of Chinese firms listed on the China and Hong Kong stock exchanges. Using the adverse selection component of Lin, Sanger, and Booth (1995), their findings indicate that for the group of Chinese cross-listed firms that are not allowed to be sold short or bought on margin, the home (A-share) market contributes more to the price discovery process over time. Suppose the dimension of series vector ΔYt equals to 2 and price series of the stock traded in SSE locates at the first in the vector; we have the following null hypotheses established for the Granger causality based on Equation (1): 1. For the Granger causality from SSE to NYSE
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