Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares

  • Yin-Hua Yeh
  • Tsun-siou Lee
  • Jen-fu Pen

DOI: 10.1023/A:1015388201113

Cite this article as:
Yeh, YH., Lee, T. & Pen, J. Review of Quantitative Finance and Accounting (2002) 18: 239. doi:10.1023/A:1015388201113


In most countries where firms list separate shares for trading by foreign and domestic investors, the prices of the foreign shares tend to be higher. In China, the reverse tends to be true. In this paper, we would like to focus on the information content in lagged premiums of Chinese A over B traded shares. The lagged premiums are found to have certain predictive power over the future returns and volatility of both A and B shares, with some interesting patterns. Specifically, an increase in the premium ratio of A shares will be followed by a rise in the return of A shares and a fall in the return of B shares. It is found that both of the investors in Chinese A- and B-share markets reveal positive feedback trading behavior. Moreover, the liquidity and information availability will affect the magnitude of such behavior especially in B-share markets. By using multivariate GARCH model, it is also demonstrated that the unexpected changes in the premium ratio of A-share price over B-share price contribute to the return volatility of both A shares and B shares. These patterns may provide foundations for the development of pricing models for equity shares under market segmentation.

market segmentationpositive feedback behaviorA sharesB sharesChina stock markets

Copyright information

© Kluwer Academic Publishers 2002

Authors and Affiliations

  • Yin-Hua Yeh
    • 1
  • Tsun-siou Lee
    • 2
  • Jen-fu Pen
    • 3
  1. 1.Department of International Trade and FinanceFu-Jen Catholic UniversityTaipeiTaiwan
  2. 2.Department of FinanceNational Taiwan UniversityTaipeiTaiwan
  3. 3.Graduate Institute of FinanceFu-Jen Catholic UniversityTaipeiTaiwan