The Impact of the Shanghai–Hong Kong Connect on Market Liquidity and Price Divergence

37 Pages Posted: 24 Jan 2017

See all articles by Michael J. Aitken

Michael J. Aitken

Macquarie Graduate School of Management

Shan Ji

Capital Markets CRC

Vito Mollica

Macquarie Graduate School of Management; Capital Markets CRC Limited (CMCRC); Macquarie University, Macquarie Business School

Xiatong Wang

Macquarie University

Date Written: December 22, 2016

Abstract

The economic growth of China has seen an increase in its demand for capital, fuelling its local stock markets. This paper examines a market liberalisation event between China and Hong Kong and its impact on market liquidity and price convergence for cross-listed stocks in the two markets. On November 17, 2014, the Shanghai Stock Exchange and the Hong Kong Stock Exchange introduced the Shanghai-Hong Kong Stock Connect (SHHKConnect), a bilateral investment channel between the two markets. The new channel brings with it accesses to new capital for domestic firms and trading expertise from new foreign participants for both regions. The SHHKConnect permits mutual market access for market participants, facilitating trade in each market using existing trading infrastructure. This study adopts a difference-in-difference methodology and finds that market liquidity as proxied by transaction costs, improves in both markets, for eligible stocks that are traded through the bilateral investment channel, three-months post November 17, 2014. Over a longer event horizon of six-months, liquidity in China continues to improve, whereas in Hong Kong it decreases. In addition, reported results identify that the pre-existing price premium between cross-listed China A-shares and Hong Kong H-shares, increases following the market design change. We attribute the increase in price divergence to the incremental improvement in liquidity in China vis-à-vis Hong Kong.

Keywords: Liquidity, Cross-listed securities, Bilateral investment

JEL Classification: G140; G180

Suggested Citation

Aitken, Michael J. and Ji, Shan and Mollica, Vito and Wang, Xiatong, The Impact of the Shanghai–Hong Kong Connect on Market Liquidity and Price Divergence (December 22, 2016). 8th Conference on Financial Markets and Corporate Governance (FMCG) 2017. Available at SSRN: https://ssrn.com/abstract=2902985 or http://dx.doi.org/10.2139/ssrn.2902985

Michael J. Aitken

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Shan Ji

Capital Markets CRC ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia
+61280884237 (Phone)

Vito Mollica (Contact Author)

Macquarie Graduate School of Management ( email )

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Xiatong Wang

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

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