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Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares

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  • Yeh, Yin-Hua
  • Lee, Tsun-siou
  • Pen, Jen-fu

Abstract

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. Copyright 2002 by Kluwer Academic Publishers

Suggested Citation

  • Yeh, Yin-Hua & Lee, Tsun-siou & Pen, Jen-fu, 2002. "Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares," Review of Quantitative Finance and Accounting, Springer, vol. 18(3), pages 239-257, May.
    • Handle: RePEc:kap:rqfnac:v:18:y:2002:i:3:p:239-57
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    Citations

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    Cited by:

    1. Yao, Shujie & He, Hongbo & Chen, Shou & Ou, Jinghua, 2018. "Financial liberalization and cross-border market integration: Evidence from China's stock market," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 220-245.
    2. He, Yan & Wang, Junbo & Wu, Chunchi, 2013. "Domestic versus foreign equity shares: Which are more costly to trade in the Chinese market?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 465-481.
    3. Shujun Ding & Zhenyu Wu & Yuanshun Li & Chunxin Jia, 2010. "Executive compensation, supervisory board, and China’s governance reform: a legal approach perspective," Review of Quantitative Finance and Accounting, Springer, vol. 35(4), pages 445-471, November.
    4. Zhijun Zhao & Yue Ma & Yuhui Liu, 2005. "Equity Valuation in Mainland China and Hong Kong: The Chinese A-H Share Premium," Working Papers 142005, Hong Kong Institute for Monetary Research.
    5. David Morelli, 2012. "Security returns, beta, size, and book-to-market equity: evidence from the Shanghai A-share market," Review of Quantitative Finance and Accounting, Springer, vol. 38(1), pages 47-60, January.
    6. Congsheng Wu, 2014. "Underpricing of homecoming A-share IPOs by Chinese firms already listed abroad," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 627-649, October.
    7. Chan, Kam C. & Fung, Hung-Gay & Thapa, Samanta, 2007. "China financial research: A review and synthesis," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 416-428.
    8. Andy Wui Wing Cheng & Iris Wing Han Yip, 2017. "China’s Macroeconomic Fundamentals on Stock Market Volatility: Evidence from Shanghai and Hong Kong," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-57, June.
    9. Qiao, Zhuo & Chiang, Thomas C. & Wong, Wing-Keung, 2008. "Long-run equilibrium, short-term adjustment, and spillover effects across Chinese segmented stock markets and the Hong Kong stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 425-437, December.

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