Abstract
Due to the heterogeneity of investor structure between the Chinese mainland stock market (A-share market) and the Hong Kong stock market (H-share market) as well as the limitations on arbitrage activities, most cross-listed stocks in the two markets (AH stocks) have the characteristics of “one asset, two prices”, in which AH stocks with the same vote rights and dividend streams are traded at different prices in different markets. Based on the VAR (LA-VAR as well) model and a four-variable system including AH stock indices (AHXA, AHXH), the China Securities Index 300 (CSI 300), and the Hang Seng Index (HSI), this paper applies a new time-varying causality test to examine the causalities in prices and volatilities for two pairings (AXHA-AHXH pairing and CSI 300-HSI pairing) during the sample period spanning from 4 January 2010 to 21 May 2021. The empirical results exhibit statistically significant time-varying causalities of the two pairings. Specifically, at the price level, AHXH has a significant negative causal effect on AHXA from October 2017 to February 2020 except for several months in 2018, while AHXA merely has a negative impact on AHXA during a short period from March 2017 to May 2017. Of note, the direction of causalities in volatilities between AHXA and AHXH reverses. A positive causality is found from AHXA to AHXH at the 5% significance level during the period of April 2014 through May 2021, while no causality is detected in the opposite direction during the whole sample period. Meanwhile, the volatilities of CSI 300 significantly Granger cause those of HSI over the whole sample period, but not vice versa. Implications of our results are discussed.
Highlights
As the overlaps of the A-share and the H-share markets, AH stocks have received widespread attention because their exchange-adjusted prices in the A-share market are consistently above the corresponding prices in the H-share market
Based on the recursive evolving window (REW) algorithm and VAR (LA-VAR as well) model, we investigate the time-varying causalities for AXHA-AHXH pairing and China Securities Index 300 (CSI 300)-Hang Seng Index (HSI) pairing within the four-variable system at both price level and volatility level
This paper aims to extend the existing literature by performing a new time-varying causality technology proposed by Shi et al [18,19] for AHXA-AHXH pairing and CSI 300-HSI pairing at both price and volatility levels
Summary
As the overlaps of the A-share and the H-share markets, AH stocks have received widespread attention because their exchange-adjusted prices in the A-share market are consistently above the corresponding prices in the H-share market. AH stocks are usually considered as the natural and ideal experimental field for testing some financial theories such as the law of one price, market efficiency theory, and price discovery theory [1,2,3,4]. Previous literature provides quite limited evidence on the causality between different prices of cross-listed stocks even if causal relationship plays a key role when depicting the nexus among variables. For cross-listed stocks, the causal relationship between the two markets can further reveal the leading-lag role of corresponding markets when they participate in the same asset pricing process [16,17]. This research attempts to analyze the causality in prices as well as causality in volatilities for AH stocks
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