The paper highlighted this week asks did price discovery in Shanghai improve after the Shanghai – Hong Kong stock connect introduction in November 2014?
Songbin Sohn from Peking University and Na Jiang from Pennsylvania State University set about answering the question by analyzing stocks that trade in both markets, the so-called A-H shares.
Because there was no Shenzhen connect in period of observation and the Shenzhen market also lists A-H shares it was possible to use data there as as a control.
What they discovered should be of interest to traders and investors alike. Hong Kong is the dog and Shanghai is the tail in terms of which prices wag which. Even before the connect Hong Kong is where most price discovery was taking place but after the connect the contribution of Hong Kong in the process rose from 78% to 91%.
The authors speculate the reason for this may be that most A-H stocks listed their H-shares first in Hong Kong so there’s history and familiarity in that market.
However the relationship between a listing in a developed and developing market of the same stock tends to favor the developed market listing in terms of where most information can be found the researchers highlight from other studies. Their work confirms this pattern holds for China as well.
The note broadly concludes that the introduction of better and/or more information must be a net benefit to the price discovery process and in turn lead to the more efficient pricing of capital; and who doesn’t want that?
You can access the paper in full via the following link Price Discovery HK – Shanghai
Happy Sunday.