Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia

48 Pages Posted: 11 Nov 2008

See all articles by Jianping Mei

Jianping Mei

New York University (NYU) - Department of Finance

José Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2004

Abstract

China s stock markets, with stringent short-sales constraints, dominance of inexperienced individual investors, a small asset float and heavy share turnover (500% per year despite a high transaction cost), provide a unique opportunity to study non-fundamental components in stock prices. In particular, several dozen Chinese firms offered two classes of shares: class A, which could only be held by domestic investors, and class B, which could only be traded by foreigners. Despite their identical rights, A-share prices were on average 420% higher than the corresponding B shares. By exploring several differentmodel specifications, we find that the turnover rate of A shares is able to explain a large portion of the cross-sectional variation in A-B share premium. Our further analysis of the relationship between asset float and share turnover shows that trading in A-share markets is more likely to be driven by speculation than by liquidity factors. Our resultsare robust after controlling for the effects of liquidity, discount rates, and differential risk and demand curves by local and foreign investors.

Suggested Citation

Mei, Jianping and Scheinkman, José and Xiong, Wei, Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia (September 2004). NYU Working Paper No. FIN-03-017. Available at SSRN: https://ssrn.com/abstract=1298841

Jianping Mei (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

José Scheinkman

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Princeton University - Department of Economics ( email )

26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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