Does Stock Liquidity Explain the A-H Premium? Evidence from Chinese Cross-Listed Stocks

Abstract

This study investigates how stock liquidity affects the price premiums of crosslinked A-H shares. Analyzing data from 2006 to 2021 reveals that liquidity differences between A and H shares significantly influence the A-H premium and their temporal dynamics. Our time series regression analysis reveals a significant autocorrelation in the AH premium, where the Amihud ratio considerably affects the auto-regressive coefficient (AR). Notably, an increase of one standard deviation in the Amihud ratio raises the AR by 0.064. Furthermore, a one standard deviation increase in the Amihud ratio is associated with substantial reductions in the A-H premium (54.2% in the cross-sectional analysis and 63.6% in the Fama-Macbeth regressions). This result demonstrates that lower liquidity in A-shares relative to their H-share counterparts significantly diminishes the A-H price premium. An interaction exists between the A-share and H-share Amihud measures, with the H-share being substantially more influential. An increase in a standard deviation in the H-share Amihud impacts the A-H premium 10.5 times greater than a similar variation in the A-share. Our analysis identified several distinct channels through which liquidity affects the AH premium

Keywords: Stock market liquidity, A-H premium, stock connect

JEL Classification: C53, G12, G17