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Connecting the markets? Recent evidence on China’s capital account liberalization

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  • Chan, Marc K.
  • Kwok, Simon

Abstract

We use longitudinal data to investigate abnormal systematic changes in the price disparity of cross-listed stocks in China. We identify a recent liberalization policy that generated an unprecedented abrupt reduction in price disparity. The policy, known as Shanghai-Hong Kong Stock Connect, partially liberalizes capital flow between both stock exchanges. We find that the announcement of the policy caused the price disparity to immediately reduce by 4.0 to 4.5 percentage points. To estimate the longer-run impact, we use a panel data model and a two-step estimator that accounts for unobserved common factors and potential nonstationarity in outcomes. The effect is somewhat smaller, reducing the price disparity by 1.6 to 2.1 percentage points, or 3.0 to 3.5 percentage points after adjusting for spillovers.

Suggested Citation

  • Chan, Marc K. & Kwok, Simon, 2018. "Connecting the markets? Recent evidence on China’s capital account liberalization," Economic Modelling, Elsevier, vol. 70(C), pages 417-428.
  • Handle: RePEc:eee:ecmode:v:70:y:2018:i:c:p:417-428
    DOI: 10.1016/j.econmod.2017.08.016
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    References listed on IDEAS

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    Cited by:

    1. Chan, Marc K & Kwok, Simon, 2015. "The Effect of Risk Sharing on Asset Prices: Natural Experiment from the Chinese Stock Market Liberalization," Working Papers 2015-19, University of Sydney, School of Economics.

    More about this item

    Keywords

    Liberalization; Chinese financial market; Law of one price; Cross-listed shares; Policy evaluation; Panel data;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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