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Inclusions and Exclusions of Stocks in Cross-Border Investments: The Case of Stock Connect

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  • Kin Ming Wong

    (Hong Kong Baptist University)

  • Kwok Ping Tsang

    (Virginia Tech)

Abstract

How does the market react when more or fewer investors are allowed to trade certain stocks? Stock Connect, a cross-border investment channel between mainland China and Hong Kong, provides a natural testing ground. Investors are allowed to trade a list of qualified stocks from the stock market on the other side, and when a stock is removed from the list, investors can only sell but cannot buy that stock. We find that the inclusion of stocks is correlated with abnormal returns, implying downward-sloping demand curves for stocks. The effect weakens over time and disappears in about 40 trading days. There are no abnormal returns when stocks are removed from the list. On the other hand, when investors can only sell some stocks, they have a significantly higher propensity to sell. Their trading style becomes more contrarian for such stocks, and they tend to trade in small amounts. After 6 months, their investment behavior returns to that before the removal.

Suggested Citation

  • Kin Ming Wong & Kwok Ping Tsang, 2023. "Inclusions and Exclusions of Stocks in Cross-Border Investments: The Case of Stock Connect," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(4), pages 701-727, December.
    • Handle: RePEc:kap:apfinm:v:30:y:2023:i:4:d:10.1007_s10690-022-09395-3
    DOI: 10.1007/s10690-022-09395-3
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    More about this item

    Keywords

    Cross-border investment; Demand curves for stocks; Slow moving capital; Stock connect;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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