Does the law of one price hold better under a flexible exchange rate system?

Sung C. Bae, Mingsheng Li and Jing Shi

Journal of Multinational Financial Management, 2009, vol. 19, issue 4, 306-322

Abstract: Using China's recent exchange rate system reform as a special event, we investigate two issues pertinent to the change in the exchange rate system: how the documented price discounts on Chinese foreign shares (B- and H-shares) changed after China shifted to a more flexible exchange rate system; and what potential factors contributed to such changes. We find significant increases in foreign share discounts after the reform and these increases cannot be explained by the changes in stock risk, information asymmetry or market liquidity. Our results provide evidence that investor expectation on long-run RMB appreciation and investor attitude toward exchange rate risk under a more flexible exchange rate system contribute to the observed increases in foreign share discounts following the reform.

Keywords: Exchange; rate; system; Price; discounts; of; Chinese; foreign; shares; Law; of; one; price; Investor; expectation; and; attitude; effect (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:19:y:2009:i:4:p:306-322

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