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

11 Pages Posted: 26 Oct 2011 Last revised: 22 Apr 2013

See all articles by Tsz-Kin Chung

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Ka-Fai Li

Hong Kong Monetary Authority

Date Written: April 21, 2013

Abstract

The price disparity between the A- and H-share markets for dual-listed firms in China 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 the uncertainty of investor model parameters is represented by the posterior standard deviation of the firm's asset volatility. Our regression analysis shows that in addition to other market-based and macro factors, parameter uncertainty explains variations in price disparity.

Keywords: Market Segmentation, A and H Shares, Uncertainty

JEL Classification: C11, G13, G32

Suggested Citation

Chung, Tsz-Kin and Hui, Cho-Hoi and Li, Ka-Fai, Explaining Share Price Disparity with Parameter Uncertainty: Evidence from Chinese A- and H-Shares (April 21, 2013). Journal of Banking and Finance , Vol. 37, (2013), pp. 1073-1083. Available at SSRN: https://ssrn.com/abstract=1949671 or http://dx.doi.org/10.2139/ssrn.1949671

Tsz-Kin Chung

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Ka-Fai Li (Contact Author)

Hong Kong Monetary Authority ( email )

55/F 2 IFC, 8 Finance Street
Central
Hong Kong
Hong Kong

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