Demand Shock, Speculative Beta, and Asset Prices: Evidence from the Shanghai-Hong Kong Stock Connect Program

Abstract

Upon the announcement of the Shanghai-Hong Kong Stock Connect program, connected stocks in the Shanghai Stock Exchange experience significant value appreciation of 1.8% over a seven-day announcement window and significant increases in turnover and volatility compared with unconnected stocks with similar firm characteristics, especially for stocks with higher market beta. The beta effect on stock prices is stronger for stocks with higher beta-to-idiosyncratic variance ratios and is reversed within three months. The results support the speculative nature of beta and the multiplier effect of speculation on demand shocks as predicted by Hong et al. (2006) and Hong and Sraer (2016).

Keywords: Demand shock; Speculative beta; Heterogeneous beliefs; Short-sale constraints; Market liberalization

JEL Classification: G11, G12, G15, G18