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Explaining Share Price Disparity with Parameter Uncertainty: Evidence from Chinese A- and H-Shares

Author

Listed:
  • Tsz-Kin Chung

    (Hong Kong Monetary Authority)

  • Ka-Fai Li

    (Hong Kong Monetary Authority)

  • Cho-Hoi Hui

    (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research)

Abstract

The price disparity between the dual-listed Chinese firms in the A- and H-share markets is one of the most intriguing puzzles in the Mainland and Hong Kong financial markets. In this paper, we revisit this price disparity puzzle using the channel of parameter uncertainty. In the presence of information asymmetry and market segmentation, investors have different views on a firm's asset volatility, and hence, different valuations of the same reference firm. We estimate a structural model for equity pricing using a Bayesian approach, in which investors' model-parameter uncertainty is represented by the posterior distributions of the firm's asset volatility. Our regression analysis shows that parameter uncertainty explains variation of the price disparity, in addition to other market-based and macro factors. We also find that parameter uncertainty is related to a firm's market-to-book ratio of equity, its age and size, and global risk appetite in the financial market.

Suggested Citation

  • Tsz-Kin Chung & Ka-Fai Li & Cho-Hoi Hui, 2011. "Explaining Share Price Disparity with Parameter Uncertainty: Evidence from Chinese A- and H-Shares," Working Papers 332011, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:332011
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shu, Chang & He, Dong & Cheng, Xiaoqiang, 2015. "One currency, two markets: the renminbi's growing influence in Asia-Pacific," China Economic Review, Elsevier, vol. 33(C), pages 163-178.
    2. Marc K. Chan & Simon S. Kwok, 2016. "Capital account liberalization and dynamic price discovery: evidence from Chinese cross-listed stocks," Applied Economics, Taylor & Francis Journals, vol. 48(6), pages 517-535, February.
    3. Funke, Michael & Shu, Chang & Cheng, Xiaoqiang & Eraslan, Sercan, 2015. "Assessing the CNH–CNY pricing differential: Role of fundamentals, contagion and policy," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 245-262.
    4. repec:eee:jbfina:v:84:y:2017:i:c:p:166-187 is not listed on IDEAS
    5. repec:eee:finana:v:53:y:2017:i:c:p:80-93 is not listed on IDEAS
    6. repec:eee:ecmode:v:69:y:2018:i:c:p:237-248 is not listed on IDEAS

    More about this item

    Keywords

    Market Segmentation; A and H Shares; Uncertainty;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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