The Effect of Risk Sharing on Asset Prices: Natural Experiment from the Chinese Stock Market Liberalization

Marc Chan and Simon Sai Man Kwok

No 2015-19, Working Papers from University of Sydney, School of Economics

Abstract: In a recent stock market reform, over half of the stocks listed in the Shanghai Stock Exchange became purchasable by foreign investors. Theory predicts that the price revaluation of an investible stock should be positively associated with the reduction in systematic risk. Using the policy as a natural experiment, we test this implication using a difference-in-differences estimator and a sample of 786 stocks in the Shanghai market. We find that risk-sharing explains over 40 percent of the price revaluation of investible stocks during the eight-month window between reform announcement and implementation. The results support the efficiency of the Chinese stock market, to the extent that the reduction of systematic risk is priced into those stocks that are affected by the liberalization.

Keywords: Abatement; Cap and Trade; Emission Markets; Environmental Policy; Emission Taxes; Permit Trading (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-cna, nep-fmk and nep-tra
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