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Cross-border equity flows and information transmission: Evidence from Chinese stock markets

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  • Bian, Jiangze
  • Chan, Kalok
  • Han, Bing
  • Shi, Donghui

Abstract

This paper examines the effects of bi-directional cross-border equity flows on stock returns, volatility and valuation differential using the unique setting of Shanghai – Hong Kong Stock Connect program (Stock-Connect) in China. Via Stock-Connect, international investors from Hong Kong (mainland China) can trade qualified stocks listed in Shanghai (Hong Kong). We find that southbound (northbound) investors’ net purchases positively predict returns of connected Hong Kong (Shanghai) stocks. However, southbound and northbound equity flows have opposite effects on stock volatility: there is a positive (negative) relationship between lagged southbound (northbound) flow volume and volatility of connected stocks in Hong Kong (Shanghai). A higher price premium of A shares over H shares leads to an increase in Southbound net purchase, which in turn results in a lower AH share price premium. Our study shows that stock market integration facilitates information sharing and narrow valuation differential across previously segmented markets.

Suggested Citation

  • Bian, Jiangze & Chan, Kalok & Han, Bing & Shi, Donghui, 2023. "Cross-border equity flows and information transmission: Evidence from Chinese stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:intfin:v:84:y:2023:i:c:s1042443123000239
    DOI: 10.1016/j.intfin.2023.101755
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    More about this item

    Keywords

    Market integration; Cross-border equity flows; Information transmission; Shanghai -Hong Kong Stock connect;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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