eThesis - School of Business electronic theses

PURPOSE OF THE STUDY The study is focused on the impact of Shanghai-Hong Kong Stock Connect on the pricing dynamics of A-H shares that are cross-listed on Shanghai Stock Exchange (A-share) and Hong Kong Stock Exchange (H-share). The Shanghai-Hong Kong Stock Connect further opens up the A-shares markets to Hong Kong and foreign investors and also allows domestic institutional investors as well as some retail investors to invest in shares listed in Hong Kong. The study is trying to explore the effect of Shanghai-Hong Kong Stock Connect on the shares that are listed on both stock exchanges.

DATA AND METHODOLOGY This study uses 37 months of 61 A-H share pairs' daily data from mainland Chinese stock exchanges and Hong Kong Stock Exchange. Regression analysis is performed on a simple measure of H-share discount and three coefficients estimated using a Markov Switching Error Correction Model.

RESULTS In this study, I find weak impact from the Shanghai-Hong Kong Stock Connect on the overall long term H-share discount. However, results show higher level of trading activities from Hong Kong investors in Shanghai decreases the H-share discount. But the effect is drowned in the overall market enthusiasm of mainland investors. The long run H discount relation is still driven by the difference in sentiment across A and H share markets. Significant impact of the Stock Connect program is found in short term co-movement between Shanghai listed A-shares and their H counterparts. No such effect is found in Shenzhen listed A-H pairs. The Stock Connect doesn't show significant impact on error correction activities. Error correction activities are still closely connected to the level of market sentiment difference and information asymmetry differences. Nevertheless, the Stock Connect program does provide a mechanism to change the error correction level, which is affected by the relative trading volume across the two markets through the program.