A COMPARATIVE STUDY ON THE TIME-VARYING MECHANISM OF PRICE DISCOVERY FOR CROSS-LISTED CHINESE STOCKS

Abstract

This study looks at price discovery of Chinese companies cross-listed in Hong Kong and Chinese stock markets. Recognizing the time-varying nature of price discovery, we initiate investigations on the changes in the price discovery mechanism under institutional changes both at an aggregate level and at the individual firm level. Specifically, we consider the institutional change brought by the Shanghai-Hong Kong Stock Connect Program, which reduces trading restrictions between the offshore equities market in Hong Kong and the domestic Shanghai market. We include the SZSE-SEHK dual-listed shares as a control group against which the impact of the Stock Connect Program can be better illustrated. Information shares of the different markets in the two-year periods before and after the implementation of the Stock Connect Program are computed. We find significant alterations in the importance of the domestic markets and that of the foreign market in price discovery. Domestic markets are found to lead price discovery during the earlier period whereas the Hong Kong market appears to have led price discovery in the later period. While our results lend limited support to a convergence hypothesis with the removal of trading barriers, the findings reconcile and elucidate the mixed results found in prior research, and serve as a springboard for future researchers. We identify limitations of the current study and outline directions for subsequent research.