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Explaining share price disparity with parameter uncertainty: Evidence from Chinese A- and H-shares

Tsz-Kin Chung, Cho-Hoi Hui and Ka Fai Li

Journal of Banking & Finance, 2013, vol. 37, issue 3, 1073-1083

Abstract: The price disparity between the A- and H-share markets for dual-listed firms in China is one of the most intriguing puzzles in the Mainland and Hong Kong financial markets. In this paper, we revisit this price disparity puzzle using the channel of parameter uncertainty. In the presence of information asymmetry and market segmentation, investors have different views on a firm’s asset volatility, and hence different valuations of the same reference firm. We estimate a structural model for equity pricing using a Bayesian approach, in which the uncertainty of investor model parameters is represented by the posterior standard deviation of the firm’s asset volatility. Our regression analysis shows that in addition to other market-based and macro factors, parameter uncertainty explains variations in price disparity.

Keywords: Market segmentation; A- and H-shares; Uncertainty (search for similar items in EconPapers)
JEL-codes: C11 G13 G32 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Explaining Share Price Disparity with Parameter Uncertainty: Evidence from Chinese A- and H-Shares (2011) Downloads
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DOI: 10.1016/j.jbankfin.2012.11.004

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