Chinese firms that cross-list in the China A-share market, China B-share market, Hong Kong, and other international locations operate in a complex environment. Theoretically, when one firm is trading on multiple exchanges, the shares across exchanges are expected to be perfect substitutes, and when they are not, an arbitrage opportunity exists. Using quantitative methods, this chapter explores whether there are price and volatility disparities. The Froot and Dabora (1999) approach is used to investigate which of the markets is dominant. Engle and Granger (1987) evaluates whether there is a long-term relationship between these markets, and error correction models are used to check for the speed at which prices are restored in equilibrium. Although the majority of cross-listed Chinese securities become cointegrated in the long term, the information flow exhibits a uni-directional feature and demonstrates that overseas markets have influential power over price changes.
Top5.1 Introduction
Financial market liberalization and the opening of a capital market in China have resulted in increasing international portfolio investment. Many empirical studies of international portfolio investment document the long-run benefits from international equity diversification (Taylor & Tonks, 1989; Le, 1991; Chan et al. 1992). According to these studies, asset prices in two different capital markets cannot be cointegrated, which means one stock price cannot be predicted from the other stock price. If it is, either there are no gains from international portfolio diversification, or the markets are not efficient or integrated. The China stock market as an emerging market gives international fund managers an opportunity for portfolio diversification. Under current laws, Qualified Foreign Institutional Investors (QFIIs) with at least $10 billion in management have been allowed to buy up to 10 percent of a Chinese company’s shares (still held in Chinese currency) from China A-share markets directly. There are also several other Chinese choices for fund managers for portfolio diversification, including B-shares, H-shares, N-shares, and Chinese securities listed in other foreign markets, such as that of London, Frankfurt, and Singapore. This provides academics with an interesting and significant research context to explore the interdependence of the different types of shares that are listed and traded in different capital markets.
However, prior studies for international Chinese listings have focused on market segmentation, especially for China A-share market and Hong Kong H-share market (Chong & Su, 2006; Lin & Wu, 2006). They have also focused on interactions among China-related market indices (Kim & Shin, 2000), cross-listed price discounts for China B-shares to A-shares (Ma, 1996; Yang & Lau, 2005), price discounts of H-shares to A-shares (Wang & Jiang, 2004) and the price discovery process for H-shares to N-shares (Su & Chong, 2007, Chen et al., 2010). Little is documented on the interdependence of the dual or triple cross-listings among Mainland China, Hong Kong and the US. Due to the different classes of shares regime, shares issued by the same Chinese company could be traded in different markets and by different groups of investors. In the context of a dual-listed Chinese firm, since both the A- and B-shares, or A- and H-shares, even A-, H-, and N-shares are issued by the same underlying Chinese firm, in an ideal environment in which markets are efficient, any information regarding firm-specific and common market factors should be reflected in the prices of both A- and B-shares, A- and H-shares, or A-, H-, and N-shares, causing the same degree of price changes simultaneously (Kim & Shin, 2000). Further, with the opening of the A-share market to the Qualified Foreign Institutional Investors since the end of 2002, market information processing and transaction executing are assumed to be improved in China A-share market accordingly.
The return behavior among Chinese dual-listings traded in Hong Kong, New York, and Mainland China (A-share and B-share markets are included) are preliminarily examined, to further study market co-movement. Cointegration analysis, Granger causality test, and the error correction model are also applied to investigate price linkages. By conducting the cointegration analysis, we can discover whether there is any improvement about market integration between Chinese markets and the other markets. By conducting causality or lead-lag relationship and error correction models among the multiple classes of Chinese shares, we can discover which markets or groups of investors are more efficient in obtaining and processing relevant information and trading upon it.
The rest of the chapter is organized as follows. Data is presented in section 5.2, followed by descriptions of the methodologies in section 5.3. In section 5.4, all of the empirical results are presented. Conclusions follow in section 5.5.