Connecting the Markets? Recent Evidence on China's Capital Account Liberalization

Marc Chan and Simon Sai Man Kwok

No 2014-11, Working Papers from University of Sydney, School of Economics

Abstract: We use longitudinal data on stock prices of cross-listed firms to investigate abnormal systematic changes in the price disparity of cross-listed stocks between the Hong Kong and Shanghai exchanges from 2002 to 2014. We identify a liberalization policy that generated an unprecedented abrupt convergence in price disparity. The policy, known as Shanghai-Hong Kong Stock Connect, serves to lower the capital control barrier of cross-market investment between both markets. In a quasi-experimental setup, we find that the announcement of the policy caused the price disparity between cross-listed shares in both markets to reduce by one-sixth. The magnitude of the effect was the largest since 2002, and was seven standard deviations away from the historical average. We also find that the convergence was asymmetric, and the convergence was driven by an upward revaluation of share prices.

Keywords: Capital account liberalization; Chinese financial market; law of one price; cross-listed shares; natural experiment (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-cna, nep-opm and nep-tra
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Citations: View citations in EconPapers (1)

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Journal Article: Connecting the markets? Recent evidence on China’s capital account liberalization (2018)
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