Abstract
In this paper, matched synchronous daily trading data, the cointegration theory and the Permanent-transitory (PT) model are employed to analyze the price discovery mechanism and evolvement of the A and the B shares in the Shanghai Stock Exchange and the Shenzhen Stock Exchange markets. The results show that the process of enlarging the scope of investor for the B shares have much improved informational flow between the A shares and the B shares in the Shanghai Stock Exchange than that of the Shenzhen Stock Exchange. At the same time, the results also show that the A shares play a dominant role in price discovery in China's emerging stock markets. Seven hypotheses were formulated and analyzed. Evidence supporting the domestic investors' information advantage hypothesis, market segmentation hypothesis, trading cost hypothesis, trading volume ratio hypothesis and negotiable volume ratio hypothesis is found in Shanghai Stock Exchange market. Evidence supporting the investor structure hypothesis, domestic investors' information advantage hypothesis and trading cost hypothesis is found in the Shenzhen Stock Exchange market.
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