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
Date Written: February 24, 2020
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
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