How Well Do Prices Converge in Anticipation of Capital Control Liberalization? Evidence from a Chinese Reform
No 22, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney
This paper analyzes the effects of a pilot program that enables cross-market investment between Hong Kong and Shanghai's stock exchanges. Among the companies that are concurrently listed in both markets, the announcement of the program causes the price disparity between shares in both markets to reduce by an average of 16.6 percent within the same day of announcement. The price convergence is directly proportional to the magnitude of preexisting price disparity. Despite the large institutional differences between both markets, the prices converge symmetrically via initial share price increases in the market that traded the stock at a relative discount. The results suggest that capital control plays an important role in explaining the disparity of equity prices between markets.
Keywords: Capital account liberalization; Chinese reform; law of one price; dual-listed shares; natural experiment (search for similar items in EconPapers)
JEL-codes: O16 F32 (search for similar items in EconPapers)
Pages: 28 pages
New Economics Papers: this item is included in nep-opm and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:uts:ecowps:22
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