Cross-Border Equity Flows and Information Transmission: Evidence from Chinese Stock Markets

57 Pages Posted: 20 Apr 2020 Last revised: 23 Mar 2022

See all articles by Jiangze Bian

Jiangze Bian

University of International Business and Economics (UIBE)

Kalok Chan

CUHK Business School

Bing Han

University of Toronto, Rotman School of Management

Donghui Shi

Shanghai Stock Exchange

Date Written: February 27, 2020

Abstract

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

Suggested Citation

Bian, Jiangze and Chan, Kalok and Han, Bing and Shi, Donghui, Cross-Border Equity Flows and Information Transmission: Evidence from Chinese Stock Markets (February 27, 2020). Available at SSRN: https://ssrn.com/abstract=3562001 or http://dx.doi.org/10.2139/ssrn.3562001

Jiangze Bian (Contact Author)

University of International Business and Economics (UIBE) ( email )

10, East Huixin Street, Chaoyang District
Beijing, 100029
China

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Donghui Shi

Shanghai Stock Exchange ( email )

Shanghai 200120
China

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