A-H Share Price Difference: A Theoretical and Empirical Analysis

64 Pages Posted: 11 Apr 2024

See all articles by Shaoran Li

Shaoran Li

Peking University

Shuyi Ge

Nankai University - Department of Finance

Yu Yan

Peking University - School of Economics

Oliver B. Linton

University of Cambridge

Abstract

We propose a two-market four-risky-asset continuous-time general equilibrium model with heterogeneous beliefs to characterize the mechanisms of A-H share price difference. Each risky asset has one noise trader whose supply follows a mean-reversion process. We distinguish three types of rational investors by their investing habits and capacities. These rational investors have subjective and heterogeneous beliefs about future price movements and make their consumption and asset allocation decisions by solving the lifetime utility maximization problem. In equilibrium, the dynamics of the A-H share price difference are determined by rational investors' beliefs about the growth of A-H share prices in the A- and H-market, the supply of risky assets, and a wealth-risk matrix. Empirically, we use an event study approach to test the implications of our theoretical model. We identify a series of events that exogenously shifted the key variables in the theoretical model, and validate our model accordingly.

Keywords: Price Premium, Dual list shares, General equilibrium

Suggested Citation

Li, Shaoran and Ge, Shuyi and Yan, Yu and Linton, Oliver B., A-H Share Price Difference: A Theoretical and Empirical Analysis. Available at SSRN: https://ssrn.com/abstract=4792118 or http://dx.doi.org/10.2139/ssrn.4792118

Shaoran Li (Contact Author)

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, 100871
China

Shuyi Ge

Nankai University - Department of Finance ( email )

94 Weijin Road
Tianjin, 300071
China

Yu Yan

Peking University - School of Economics ( email )

Yiheyuan Road
the school of economics builiding
Beijing, 000000
China

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

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