The Value of Information in the China’s Connected Market
53 Pages Posted: 29 Jun 2019 Last revised: 16 Nov 2020
Date Written: February 1, 2019
The paper studies the role of information in cross-market trading by using Shanghai/Shenzhen-Hong Kong Stock Connect Program as a novel laboratory. With a complete history of daily stock-level holdings of all international (northbound) investors, we find that weekly changes in northbound shareholdings (CNS) have a cross-sectional predictive power for A-share returns. A long-short strategy based on CNS earns an excess return of 0.45% per week. We present evidence that northbound investors are well informed about firm fundamentals, especially for firms with higher global exposure. Besides, private information is incorporated into CNS by mainland insiders who take advantage of regulatory arbitrage by \homemade" foreign trading. Attention-induced Copycats further confirm the informativeness of international participants in China. Our findings suggest the value of information possessed by newly introduced investors as well as the importance of international cooperative regulation during market liberalization.
Keywords: Cross-border Flows; Informed Trading; Regulatory Arbitrage; Stock Connect
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation