Abstract

We examine the price discovery process for cross-listing A- and H- shares, the Chinese stocks simultaneously listed in the Mainland China (MC) and the Hong Kong (HK) stock markets. The empirical results of a sample of 30 A-H stock pairs from 2001 to 2007 show that the prices for cross-listing A- and H- shares in MC and HK stock markets are becoming more and more cointegrated, displaying an evolution of the emerging stock market in MC. The MC market contributes to most of the price discovery, according to Hasbrouck’s (1995) IS method and the Gonzalo and Granger (1995) PT method. We then combine the results of econometrics method (IS) with the decomposition of the bid-ask spread in market microstructure research. The regression results show a significantly positive relationship between the relative IS of Mainland China and its relative Adverse Selection Component of the effective relative spread, indicating that the reason for MC dominating price discovery is the information advantage of MC domestic investors. The IS of MC relative to HK is also positively related with the Shenzhen Stock Exchange dummy and the 2006 year dummy, when the QDII policy was carried out.

Keywords: Price discovery, Cross-listing, Cointegration, Chinese securities

JEL Classification: D82, G14, G28, G32, O16

Doctoral candidate in Finance, School of Economics and Management,
Tsinghua University,
E-mail:majy.05@sem.tsinghua.edu.cn

Banking and Finance, Australian School of Business,
The University of New South Wales,
Sydney, NSW 2052 Australia.
E-mail: peter.swan@unsw.edu.au

Professor of Finance, School of Economics and Management,
Tsinghua University,
E-mail:songfm@sem.tsinghua.edu.cn