An empirical study on the threshold cointegration of Chinese A and H cross-listed shares

Haiqiang Chen and Yanli Zhu

Journal of Applied Statistics, 2015, vol. 42, issue 11, 2406-2419

Abstract: We investigate the dynamic relationship between the prices of Chinese A and H market cross-listed shares using the Enders-Siklos threshold cointegration approach. Our data are the daily closing prices of the Hang Seng China AH (A) index and the Hang Seng China AH (H) index from 4 January 2006 to 1 November 2013. We find a threshold cointegration between these two indices, instead of the linear cointegration well established in the literature. The short-term adjustment to the equilibrium shows an asymmetric effect according to the price deviation from the equilibrium. Moreover, using a Granger causality test, we find a bi-directional causality between these two markets, indicating a close relationship between them. A pairs trading rule, based on the estimated threshold cointegration model, demonstrates the usefulness of our results as it generates a significantly higher return than a naive buy-and-hold trading rule.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:taf:japsta:v:42:y:2015:i:11:p:2406-2419

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DOI: 10.1080/02664763.2015.1034660

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