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Does the law of one price hold better under a flexible exchange rate system?

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  • Bae, Sung C.
  • Li, Mingsheng
  • Shi, Jing
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    Abstract

    Using China's recent exchange rate system reform as a special event, we investigate two issues pertinent to the change in the exchange rate system: how the documented price discounts on Chinese foreign shares (B- and H-shares) changed after China shifted to a more flexible exchange rate system; and what potential factors contributed to such changes. We find significant increases in foreign share discounts after the reform and these increases cannot be explained by the changes in stock risk, information asymmetry or market liquidity. Our results provide evidence that investor expectation on long-run RMB appreciation and investor attitude toward exchange rate risk under a more flexible exchange rate system contribute to the observed increases in foreign share discounts following the reform.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Multinational Financial Management.

    Volume (Year): 19 (2009)
    Issue (Month): 4 (October)
    Pages: 306-322

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    Handle: RePEc:eee:mulfin:v:19:y:2009:i:4:p:306-322

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    Web page: http://www.elsevier.com/locate/mulfin

    Related research

    Keywords: Exchange rate system Price discounts of Chinese foreign shares Law of one price Investor expectation and attitude effect;

    References

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