Cross-Border Equity Flows and Information Transmission: Evidence from Chinese Stock Markets
57 Pages Posted: 20 Apr 2020 Last revised: 23 Mar 2022
Date Written: February 27, 2020
This paper examines the effects of bi-directional cross-border equity flows on stock returns, volatility and valuation differential using the unique Stock Connect program in China as a natural experiment. Via Stock Connect, investors from Hong Kong (mainland China) can trade qualified stocks listed in Shanghai (Hong Kong). We find that southbound (northbound) investors net purchases positively predict returns of connected Hong Kong (Shanghai) stocks. However, southbound and northbound trades have opposite effects on stock volatility: there is a positive (negative) relationship between lagged southbound (northbound) volume and volatility of connected stocks in Hong Kong (Shanghai). A higher price premium of A shares over H shares attracts more Southbound net flow which in turn leads to a lower AH share price premium. Our study shows that stock market integration facilitates information sharing and narrow valuation differential across previously segmented markets. But the effects of stock market integration depend importantly on local market environments such as investor clienteles.
Keywords: Market Integration, Cross-Border Equity Flows, Information Transmission, Shanghai -Hong Kong Stock Connect
JEL Classification: G12, G14, G18
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