Are Domestic Investors Better Informed than Foreign Investors?: Evidence from the Perfectly Segmented Market in China

Kalok Chan, Albert Menkveld and Zhishu Yang
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Kalok Chan: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 4, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: This paper uses the perfect market segmentation setting in China’s stock market to examine whether foreign investors are at informational disadvantage relative to domestic investors. We analyze the price discovery roles of the A- (domestic investors) and B-share (foreign investors) markets in China using a new database of transactions data. Before Feb 19, 2001, the A-share market leads the B-share market in price discovery - the signed volume and quote revision of the A-share market have strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors are allowed to invest on the B-share market, we also find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the Hasbrouck (1995) information share analysis reveals that A-shares continue to dominate price discovery.

Keywords: Market microstructure; Informational role; Segmented markets; Chinese stock markets (search for similar items in EconPapers)
JEL-codes: D82 F21 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (15)

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