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How Well Do Prices Converge in Anticipation of Capital Control Liberalization? Evidence from a Chinese Reform

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Abstract

This paper analyzes the effects of a pilot program that enables cross-market investment between Hong Kong and Shanghai's stock exchanges. Among the companies that are concurrently listed in both markets, the announcement of the program causes the price disparity between shares in both markets to reduce by an average of 16.6 percent within the same day of announcement. The price convergence is directly proportional to the magnitude of preexisting price disparity. Despite the large institutional differences between both markets, the prices converge symmetrically via initial share price increases in the market that traded the stock at a relative discount. The results suggest that capital control plays an important role in explaining the disparity of equity prices between markets.

Suggested Citation

  • Marc K Chan, 2014. "How Well Do Prices Converge in Anticipation of Capital Control Liberalization? Evidence from a Chinese Reform," Working Paper Series 22, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ecowps:22
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    File URL: http://www.uts.edu.au/sites/default/files/edg_wp22.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Marc K Chan, 2014. "How Well Do Prices Converge in Anticipation of Capital Control Liberalization? Evidence from a Chinese Reform," Working Paper Series 22, Economics Discipline Group, UTS Business School, University of Technology, Sydney.

    More about this item

    Keywords

    Capital account liberalization; Chinese reform; law of one price; dual-listed shares; natural experiment;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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