Dual-Listed Shares and Trading

Abstract

We study companies with dual-listed shares in China (mainland) and Hong Kong. When China has a short-sale ban, Chinese stock prices are 1.8x as high as Hong Kong prices (on average). Stock pairs with higher fundamental volatilities or more volatile order flows have higher price disparities (on average). The average stock pair's return difference is volatile and has a standard deviation of 8.8% per week. This paper shows that order flows can affect both a company's fundamental price and/or its transitory prices. In Hong Kong, transitory variance accounts for 39% of a stock's total variance. These results are surprising because the average market capitalization is over USD 8 billion for the Hong Kong-listed shares and the turnover is over 2.5x per annum. We exploit a quasi-natural experiment in which the short-sale ban is lifted for some Chinese stocks but not others. After the ban is lifted, the affected shares trade at parity. We estimate that lifting the short-sale ban in China (mainland) reduces weekly transitory volatility in Hong Kong by 49 bp per week because it enables a hedging mechanism.

Keywords: Dual-Listed Shares, Trading Imbalances, Cost of a Short-Sale Ban

JEL Classification: G12, G14