Capital account liberalization and dynamic price discovery: evidence from Chinese cross-listed stocks

Marc Chan and Simon Sai Man Kwok

Applied Economics, 2016, vol. 48, issue 6, 517-535

Abstract: 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.

Date: 2016
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Working Paper: Capital Account Liberalization and Dynamic Price Discovery: Evidence from Chinese Cross-Listed Stocks (2014)
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DOI: 10.1080/00036846.2015.1083087

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