Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
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.
Amihud, Y. and H. Mendelson, “Asset Pricing and the Bid-Asked Spread.” Journal of Financial Economics 17, 223-247, (1986).
Bailey,W., “Risk and Return on China's New Stock Markets: Some Preliminary Evidence.” Pacific-Basin Finance Journal 2, 243-260, (1994).
Bailey,W. and J. Jagtiani, “Foreign Ownership Restrictions and Stock Prices in the Thai Capital Market.” Journal of Financial Economics 36, 57-87, (1994).
Bollerslev, T., “Modeling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized ARCH Model.” Review of Economics and Statistics 72, 498-505, (1990).
Chui, C. W. and C. Y. Kowk, “Cross-Autocorrelation between A Shares and B Shares in the Chinese Stock Market.” Journal of Financial Research 21, 333-353, (1998).
De Long, J. B., A. Shleifer, L. H. Summers and R. J. Waldman, “Noise Trader Risk in Financial Markets.” Journal of Political Economy 98, 703-738, (1990).
Domowitz, I., J. Glen and A. Madhavan, “Market Segmentation and Stock Prices: Evidence from an Emerging Market.” Journal of Finance 52, 1059-1085, (1997).
Eun, C. S. and S. Janakiramanan, “A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership.” Journal of Finance 41, 897-913, (1986).
Hall, P. H., “Risk and Return Characteristics of Chinese Equities: A Comparison of Hong Kong and Shanghai 'B' Shares.” 1997 Ninth Annual PACAP Finance Conference, 1997.
Hietala, P. T., “Asset Pricing in Partially Segmented Markets: Evidence from the Finnish Market.” Journal of Finance 44, 697-718, (1989).
Lam, S. S., “Control versus Firm Value: The Impact of Restrictions on Foreign Share Ownership.” Financial Management 26, 48-61, (1997).
Lee, C., A. Shleifer and R. Thaler, “Investment Sentiment and the Closed End Fund Puzzle.” Journal of Finance 46, 75-110, (1991).
Ma, X., “Capital Controls, Market Segmentation and Stock Prices: Evidence from the Chinese Stock Market.” Pacific-Basin Finance Journal 4, 219-239, (1996).
Merton, R., “Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance 42, 483-510, (1987).
Shang, J. and T. O'Brien, “China's Equity Markets: An Analysis of Same Company A-Share and B-Share Prices, 1993-1996.” 1997 Ninth Annual PACAP Finance Conference, 1997.
Sims, C. A., “Macroeconomics and Reality.” Econometrica 48, 1-48, (1980).
Stulz, R. M. and W. Wasserfallen, “Foreign Equity Investment Restriction, Capital Flight, and ShareholderWealth Maximization: Theory and Evidence.” Review of Financial Studies 8, 1019-1057, (1995).
Su, D. W. and B. M. Fleisher, “Risk, Return and Regulation in Chinese Stock Markets.” Journal of Economics and Business 50, 239-256, (1998).
Su, D.W. and B. M. Fleisher, “An Empirical Investigation of Underpricing in Chinese IPOs.” Pacific-Basin Finance Journal 7, 173-203, (1999).
Yeh, Y. H., C. C. Chiu and P. G. Shu, “The 1997 Thai Baht Devaluation and International Stock Markets: Global, Asia-Pacific Regional and Local Forces.” Asia Pacific Journal of Finance 2, 133-156, (1999).
Yeh, Y. H. and T. S. Lee, “The Interaction and Volatility Asymmetry of Unexpected Returns in the Greater China Stocks Markets.” Global Finance Journal 11, 129-149, (2000).
- Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares
Review of Quantitative Finance and Accounting
Volume 18, Issue 3 , pp 239-257
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links
- market segmentation
- positive feedback behavior
- A shares
- B shares
- China stock markets
- Industry Sectors
- Author Affiliations
- 1. Department of International Trade and Finance, Fu-Jen Catholic University, Taipei, Taiwan
- 2. Department of Finance, National Taiwan University, Taipei, Taiwan
- 3. Graduate Institute of Finance, Fu-Jen Catholic University, Taipei, Taiwan