Capital account reform and short- and long-run stock price leadership

Charlie X. Cai, Paul B. McGuinness and Qi Zhang

The European Journal of Finance, 2017, vol. 23, issue 10, 916-945

Abstract: This paper studies the effect of capital account liberalization policies on the price discovery of cross-listings in Chinese stocks. We construct a non-linear causality framework that decomposes short- and long-run dimensions of price leadership. Our analysis shows that capital account liberalization has had a profound effect on long-run A- and H-price leadership traits. Specifically, increased inward capital movement from Qualified Foreign Institutional Investors strengthens long-term leadership in the mainland A-market. Similarly, increased capital outflow from the Chinese mainland galvanizes long-term price discovery processes in the Hong Kong H-market. We thus offer strong evidence that capital account liberalization promotes stock market efficiency in the long-run. The present study's empirical account also suggests that such capital flows inhibit short-term lead-lag effects.

Date: 2017
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DOI: 10.1080/1351847X.2015.1105272

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