Download This PaperThe Value of Information in the China’s Connected Market
58 Pages Posted: 29 Jun 2019 Last revised: 29 Jun 2022
Date Written: February 1, 2019
Abstract
The paper studies the role of information in cross-border trading by using the Shanghai / Shenzhen-Hong Kong Stock Connect as a novel laboratory. We present evidence that northbound investors are informed about firm fundamentals. A long-short strategy earns an average weekly return of 0.34% after adjusting for the Chinese three-factor model of Liu, Stambaugh, and Yuan (2019). The predictability is more pronounced among firms with a high level of international exposure. Moreover, northbound flows are useful in explaining the subsequent trading activities of domestic investors, which becomes more salient over time and among firms experiencing more attention-induced copycat trading. The copycat effect still holds in a subtle setup of exogenous suspensions in the Stock Connect. Meanwhile, we find similar evidence in information advantage of southbound flows in Hong Kong stocks with high mainland exposure.
Keywords: Copycats; Cross-border Flows; Informed Trading; Stock Connect
JEL Classification: G10, G12, G14
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