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Stock Market Liberalization and Price Discovery: The Shenzhen-Hong Kong Stock Connect

Cao, Jingyu LU (2018) NEKN02 20181
Department of Economics
Abstract
After the success of Shanghai-Hong Kong Stock Connect, China chose to deepen the opening of the stock market further and launched the Shenzhen-Hong Kong Stock Connect on December 5, 2016. This paper examines the market liberalization between China and Hong Kong stock markets and the price discovery progress for cross-listed stocks in the two markets before and after the Shenzhen-Hong Kong Stock Connect. Common factor weights from Gonzalo and Granger’s permanent transitory model (PT model) and Hasbrouck’s information shares (IS model) are applied in the thesis to exam the relative contribution to the price discovery of the two markets.
This thesis studies the two questions by selected 14 SZ-HK cross-listed stocks. The finding based on... (More)
After the success of Shanghai-Hong Kong Stock Connect, China chose to deepen the opening of the stock market further and launched the Shenzhen-Hong Kong Stock Connect on December 5, 2016. This paper examines the market liberalization between China and Hong Kong stock markets and the price discovery progress for cross-listed stocks in the two markets before and after the Shenzhen-Hong Kong Stock Connect. Common factor weights from Gonzalo and Granger’s permanent transitory model (PT model) and Hasbrouck’s information shares (IS model) are applied in the thesis to exam the relative contribution to the price discovery of the two markets.
This thesis studies the two questions by selected 14 SZ-HK cross-listed stocks. The finding based on common factor weights shows the Shenzhen stock market contributes equally with Hong Kong stock market both before and after the Connect, though the average of the percentage for Shenzhen market is 41.36% and 48.56% respectively, which, however, does not reject the hypothesis of equilibrium contribution, is not exact 50%. Similar to this, the calculation of information shares (IS model) presents that A shares’ contribution is 40.60% (49.84%) on average before (after) the Connect. The t-statistics results present no rejection of the null hypothesis of 50% for the two sample period. But the intuitive change in the mean percentage suggests the contribution of SZ increases after the Connect.
Objectively, the Connect allows Hong Kong-informed investors to trade A-shares in Shenzhen, which will incorporate more new information into A-share prices, thereby increasing SZ's relative contribution to price discovery. This means that when emerging stock markets are open to investors in developed markets, the price discovery function in emerging markets will be improved. (Less)
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author
Cao, Jingyu LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
Price discovery, Shenzhen-Hong Kong Stock Connect, Information shares, Chinese A-H shares
language
English
id
8948625
date added to LUP
2018-07-02 15:38:37
date last changed
2018-07-02 15:38:37
@misc{8948625,
  abstract     = {After the success of Shanghai-Hong Kong Stock Connect, China chose to deepen the opening of the stock market further and launched the Shenzhen-Hong Kong Stock Connect on December 5, 2016. This paper examines the market liberalization between China and Hong Kong stock markets and the price discovery progress for cross-listed stocks in the two markets before and after the Shenzhen-Hong Kong Stock Connect. Common factor weights from Gonzalo and Granger’s permanent transitory model (PT model) and Hasbrouck’s information shares (IS model) are applied in the thesis to exam the relative contribution to the price discovery of the two markets.
This thesis studies the two questions by selected 14 SZ-HK cross-listed stocks. The finding based on common factor weights shows the Shenzhen stock market contributes equally with Hong Kong stock market both before and after the Connect, though the average of the percentage for Shenzhen market is 41.36% and 48.56% respectively, which, however, does not reject the hypothesis of equilibrium contribution, is not exact 50%. Similar to this, the calculation of information shares (IS model) presents that A shares’ contribution is 40.60% (49.84%) on average before (after) the Connect. The t-statistics results present no rejection of the null hypothesis of 50% for the two sample period. But the intuitive change in the mean percentage suggests the contribution of SZ increases after the Connect.
Objectively, the Connect allows Hong Kong-informed investors to trade A-shares in Shenzhen, which will incorporate more new information into A-share prices, thereby increasing SZ's relative contribution to price discovery. This means that when emerging stock markets are open to investors in developed markets, the price discovery function in emerging markets will be improved.},
  author       = {Cao, Jingyu},
  keyword      = {Price discovery,Shenzhen-Hong Kong Stock Connect,Information shares,Chinese A-H shares},
  language     = {eng},
  note         = {Student Paper},
  title        = {Stock Market Liberalization and Price Discovery: The Shenzhen-Hong Kong Stock Connect},
  year         = {2018},
}