Investor Composition and Stock Return Patterns: A Study of Momentum in the Chinese A- and B-Shares Markets

39 Pages Posted: 3 Jan 2018

See all articles by Andy C.W. Chui

Andy C.W. Chui

Hong Kong Polytechnic University

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: July 20, 2017

Abstract

Listed Chinese companies can issue A-shares that are held mainly by domestic investors and B-shares that are held mainly by foreign investors. Although these twin shares have identical cash flow rights and are traded in the same location, A-shares are almost always priced higher than B-shares. A-shares also exhibit substantially higher turnover, suggesting that the clientele holding these shares trade more actively than the B-share investors do. To describe the relation between the returns in these markets we provide a descriptive model where the A-share market is in some sense more and in some sense less efficient than the B-share market. Because insiders trade in the A-share market, prices capture information faster than that in the B-share market. However, A-share market participants also trade on noise. We also assume that all market participants are overconfident about their prior beliefs, and thus underreact to fundamental information and ignore information embedded in stock prices. The model generates momentum for B-shares and reversals for A-shares as well as cross-predictability, i.e., A-share (B-share) returns predict future B-share (A-share) returns. We provide empirical evidence that is consistent with all of these predictions.

Keywords: Asset Pricing, Information, Investor Composition, Momentum, Behaviour Finance

JEL Classification: G02, G12, G14

Suggested Citation

Chui, Andy Chun Wai and Titman, Sheridan, Investor Composition and Stock Return Patterns: A Study of Momentum in the Chinese A- and B-Shares Markets (July 20, 2017). Available at SSRN: https://ssrn.com/abstract=3094299 or http://dx.doi.org/10.2139/ssrn.3094299

Andy Chun Wai Chui (Contact Author)

Hong Kong Polytechnic University ( email )

M808, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
(852)2766 7105 (Phone)
(852)2356 9550 (Fax)

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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