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Stock Market Openness And Market Quality: Evidence From The Shanghai–Hong Kong Stock Connect Program

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  • Ke Xu
  • Xinwei Zheng
  • Deng Pan
  • Li Xing
  • Xuekui Zhang

Abstract

We study the impact of capital market openness on high‐frequency market quality in China. The Shanghai–Hong Kong Stock Connect program (SHHKConnect) opens China's stock market to foreign investors and offers a natural experiment to investigate this question. Using a difference‐in‐differences approach, we find that market liberalization leads to lower quoted spread, lower effective spread, lower market depth, and higher short‐term volatility. Our findings imply that opening the markets to more sophisticated foreign investors is associated with higher competition and more cross‐market arbitrage activities, narrowing the spread and reducing liquidity providers’ profits, but increasing the price impact and short‐term volatility of connected stocks.

Suggested Citation

  • Ke Xu & Xinwei Zheng & Deng Pan & Li Xing & Xuekui Zhang, 2020. "Stock Market Openness And Market Quality: Evidence From The Shanghai–Hong Kong Stock Connect Program," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(2), pages 373-406, May.
    • Handle: RePEc:bla:jfnres:v:43:y:2020:i:2:p:373-406
    DOI: 10.1111/jfir.12210
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