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Testing for Expected Return and Market Price of Risk in Chinese A-B Share Market: A Geometric Brownian Motion and Multivariate GARCH Model Approach

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  • Jie Zhu

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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Abstract

There exist dual-listed stocks which are issued by the same company in some stock markets. Although these stocks bare the same firm-specific risk and enjoy identical dividends and voting policies, they are priced differently. Some previous studies show this seeming deviation from the law of one price can be solved due to different ex- pected return and market price of risk for investors holding heterogeneous beliefs. This paper provides empirical evidence for that argument by testing the expected return and market price of risk between Chinese A and B shares listed in Shanghai and Shenzhen stock markets. Models with dynamic of Geometric Brownian Motion are adopted, multivariate GARCH models are also introduced to capture the feature of time-varying volatility in stock returns. The results suggest that the different pric- ing can be explained by the difference in expected returns between A and B shares in Chinese stock markets. However, the difference between market prices of risk is insignificant for both markets if GARCH models are adopted.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-15.

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Length: 35
Date of creation: 05 Mar 2008
Date of revision:
Handle: RePEc:aah:create:2008-15

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: China stock market; market segmentation; expected return; market price of risk; GBM; GARCH;

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  1. Roger H. Gordon & Wei Li, 1999. "Government as a Discriminating Monopolist in the Financial Market: The Case of China," NBER Working Papers 7110, National Bureau of Economic Research, Inc.
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  8. Sugato Chakravarty & Asani Sarkar & Lifan Wu, 1998. "Information asymmetry, market segmentation, and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares," Research Paper 9820, Federal Reserve Bank of New York.
  9. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  10. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  11. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," NBER Working Papers 11362, National Bureau of Economic Research, Inc.
  12. Bailey, Warren & Jagtiani, Julapa, 1994. "Foreign ownership restrictions and stock prices in the Thai capital market," Journal of Financial Economics, Elsevier, vol. 36(1), pages 57-87, August.
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