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Factors Influencing Equity Return Correlations between China¡¯s Pairs of A- and B-Share Markets: Effect of QFII¡¯s Implementation

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  • Jung-Lieh Hsiao
  • Teng-Tsai Tu
  • Mei-Chun Chen

Abstract

This paper was intended to examine factors influencing the correlations between A- and B-shares of individual firms, and explore the effects of Qualified Foreign Institutional Investor¡¯s (QFII) implementation on correlations. The empirical results show that interest rate differential, relative turnover rate, relative return volatility, and market sentiment had impacts on correlation both before and after the QFII¡¯s implementation. After its implementation, correlations became more sensitive to premium, relative turnover rate and market sentiment. Furthermore, the estimated constant term for overall market correlation became more negative (raw values from -0.3413 to -0.8815), indicating an increasing correlation between A- and B-shares¡¯ returns. The policy implications are that much benefit of diversification into emerging markets such as paired A-and B-shares can be accomplished, together with taking several influential factors into account.

Suggested Citation

  • Jung-Lieh Hsiao & Teng-Tsai Tu & Mei-Chun Chen, 2017. "Factors Influencing Equity Return Correlations between China¡¯s Pairs of A- and B-Share Markets: Effect of QFII¡¯s Implementation," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(2), pages 105-123, April.
    • Handle: RePEc:jfr:ijfr11:v:8:y:2017:i:2:p:105-123
    DOI: 10.5430/ijfr.v8n2p105
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