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Panel Cointegration of Chinese A and B Shares

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  • Ahlgren, Niklas

    ()
    (Swedish School of Economics, Department of Finance)

  • Sjö, Bo

    ()
    (Swedish Agency for Development Evaluation)

  • Zhang, Jianhua

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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    Abstract

    In this paper we study market segmentation and information flows in China’s stock markets. By using panel data methods we test for a unit root in the price premium of domestic investors' A shares over foreign investors’ B shares as well as cointegration between the prices of the A and B shares on the Shanghai and Shenzhen stock exchanges. We find that the A-share premia are nonstationary and the A- and B-share prices are not cointegrated up till January 2001. After February 2001, when domestic investors were allowed to trade B shares, the A-share premia become stationary and the A- and B-share prices cointegrated. Our findings suggest that the relaxation of the investment restrictions decreased the information asymmetry betwen the A- and B-share markets in China.

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    File URL: http://hdl.handle.net/2077/9996
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 300.

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    Length: 33 pages
    Date of creation: 21 Apr 2008
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0300

    Contact details of provider:
    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Related research

    Keywords: Chinese A and B shares; Market segmentation; Information flow; Panel unit root and cointegration tests;

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    1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    2. 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.
    3. Paul McGuinness, 2002. "Reform in China's 'B' share markets and the shrinking A/B share price differential," Applied Economics Letters, Taylor & Francis Journals, vol. 9(11), pages 705-709.
    4. Tom Engsted & Jesper Lund, 1997. "Common stochastic trends in international stock prices and dividends: an example of testing overidentifying restrictions on multiple cointegration vectors," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 659-665.
    5. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    6. Wang, Zijun & Kutan, Ali M. & Yang, Jian, 2005. "Information flows within and across sectors in Chinese stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 767-780, September.
    7. John Fernald & John H. Rogers, 2000. "Puzzles in the Chinese stock market," Working Paper Series WP-00-13, Federal Reserve Bank of Chicago.
    8. Gary Gang Tian, 2007. "Are Chinese Stock Markets Increasing Integration With Other Markets In The Greater China Region And Other Major Markets?," Australian Economic Papers, Wiley Blackwell, vol. 46(3), pages 240-253, 09.
    9. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    10. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    11. Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 41.
    12. Jian Yang, 2003. "Market Segmentation and Information Asymmetry in Chinese Stock Markets: A VAR Analysis," The Financial Review, Eastern Finance Association, vol. 38(4), pages 591-609, November.
    13. Chan, Kam C. & Fung, Hung-Gay & Thapa, Samanta, 2007. "China financial research: A review and synthesis," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 416-428.
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