Stock Market Openness and Market Quality: Evidence from the Shanghai-Hong Kong Stock Connect Program

Journal of Financial Research, Forthcoming

48 Pages Posted: 24 Mar 2020

See all articles by Ke Xu

Ke Xu

University of Victoria

Xinwei Zheng

Department of Finance

Deng Pan

Fudan University

Li Xing

University of Victoria

Xuekui Zhang

University of Victoria

Date Written: February 24, 2020

Abstract

This paper studies the impact of capital market openness on high frequency market quality in China. The Shanghai-Hong Kong Stock Connect (SHHKConnect) program opens China's stock market to foreign investors and offers a natural experiment to investigate this question. Using a difference-in-differences approach, we find that market liberalization leads to lower bid-ask spread, lower effective spread, lower market depth and higher short-term volatility. Our findings imply that opening the markets to more sophisticated foreign investors is associated with higher competition and more cross-market arbitrage activities, narrowing the spread and reducing liquidity providers' profits, but increasing the price impact and short-term volatility of connected stocks.

Keywords: capital market openness, competition, cross-market arbitrage, bid-ask spread, effective spread, short-term volatility, Shanghai-Hong Kong Stock Connect

JEL Classification: G10

Suggested Citation

Xu, Ke and Zheng, Xinwei and Pan, Deng and Xing, Li and Zhang, Xuekui, Stock Market Openness and Market Quality: Evidence from the Shanghai-Hong Kong Stock Connect Program (February 24, 2020). Journal of Financial Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3543713 or http://dx.doi.org/10.2139/ssrn.3543713

Ke Xu (Contact Author)

University of Victoria ( email )

3800 Finnerty Rd
Victoria, British Columbia V8P 5C2
Canada

Xinwei Zheng

Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Deng Pan

Fudan University

220 Handan Road
Shanghai, 200433
China

Li Xing

University of Victoria ( email )

3800 Finnerty Rd
Victoria, British Columbia V8P 5C2
Canada

Xuekui Zhang

University of Victoria ( email )

3800 Finnerty Rd
Victoria, British Columbia V8P 5C2
Canada
3176620626 (Phone)
V8N 1V4 (Fax)

HOME PAGE: http://www.math.uvic.ca/~xuekui/

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