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Structural breaks, cointegration and B share discount in Chinese stock market

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  • Zhang, Dayong
  • Dickinson, David
  • Barassi, Marco

Abstract

The Chinese Stock market had a special feature up to 2001 in that the stocks trading was segmented according to the type of investor (domestic and foreign). Since companies can issue both A shares (for domestic residents) and B shares (foreign investors) and the legal status of these shares are the same, they would be expected to have similar fundamental expected dividend flows. If discount rates are fixed this should imply that the share prices will be cointegrated. We test this proposition and find that there is no evidence for a long-run relationship for the time period under investigation. Then we show there are two structural breaks, corresponding to the regulatory shift in 2001 and the Asian financial crisis. After correcting for these structural breaks, we identify long run relationships and consider reasons for why such a relationship exists. By doing so we are able to throw some light on why there is a significant discount on B shares relative to the same share traded in the A market.

Suggested Citation

  • Zhang, Dayong & Dickinson, David & Barassi, Marco, 2006. "Structural breaks, cointegration and B share discount in Chinese stock market," MPRA Paper 70353, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70353
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    References listed on IDEAS

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    Cited by:

    1. Chen, Jing & Buckland, Roger & Williams, Julian, 2011. "Regulatory changes, market integration and spillover effects in the Chinese A, B and Hong Kong equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 351-373, September.
    2. Ghysels, Eric & Liu, Hanwei, 2017. "Downside Risk in the Chinese Stock Market - Has it Fundamentally Changed?," CEPR Discussion Papers 12180, C.E.P.R. Discussion Papers.
    3. Yi Zhang, 2013. "The Links between the Price of Oil and the Value of US Dollar," International Journal of Energy Economics and Policy, Econjournals, vol. 3(4), pages 341-351.
    4. Hernandez-Villafuerte, Karla Vanessa, 2008. "The Role Of Asymmetric Price Transmission And Structural Breaks In The Relationship Between Costa Rican Markets Of Livestock Cattle, Beef And Milk," 2009 Conference, August 16-22, 2009, Beijing, China 51697, International Association of Agricultural Economists.

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    More about this item

    Keywords

    Chinese stock market; Cointegration; Structure break; B share discount.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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