Capital account liberalization and dynamic price discovery: evidence from Chinese cross-listed stocks
- Publication Type:
- Journal Article
- Citation:
- Applied Economics, 2016, 48 (6), pp. 517 - 535
- Issue Date:
- 2016-02-01
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| Filename | Description | Size | |||
|---|---|---|---|---|---|
| Capital account liberalization and dynamic price discovery evidence from Chinese cross listed stocks.pdf | Published Version | 1.95 MB |
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© 2015 Taylor & Francis. We analyse the effects of a recent financial reform (Shanghai-Hong Kong Stock Connect) that enables cross-market investment between Hong Kong and Shanghai stock exchanges. Using a VECM, we find that the reform announcement considerably narrows the equilibrium level of price disparity and strengthens the price comovement of shares that are cross-listed in both markets. The estimated equilibrium relationship is in support of the relative law of one price. We find that both markets adjust in response to a disequilibrium in price disparity, leading to a sizeable error correction activity. The Shanghai market contributes to approximately two-thirds of the price discovery process. Competition and informativeness of trading affect the relative role of price discovery in each market. Finally, the reform implementation reinforces the long-run cointegration relationship and strengthens the short-run price comovements of cross-listed stocks despite the widening price disparity during the period.
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