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The effect of the Shanghai-Hong Kong Stock Connect program on market efficiency in China

  • 1.

    International Institute of Finance, School of Management, University of Science and Technology of China, Hefei 230601, China

  • 2.

    School of Management, University of Science and Technology of China, Hefei 230026, China

Cite this:
https://doi.org/10.52396/JUST-2021-0157
  • Received Date: 01 July 2021
  • Rev Recd Date: 01 September 2021
  • Publish Date: 30 September 2021
    Abstract

  • Abstract

    We study the effect of the Shanghai-Hong Kong Stock Connect program on market efficiency in China. Applying a difference-in-differences model, we find that connected firms experience a higher about 4% price impact and significantly increased turnover, liquidity, and volatility in 20 days following the announcement. Our results support the evidence that investors demand a premium for volatility risk. Furthermore, in the Shanghai market, the participation of Hong Kong investors helps reduce the volatility of connected stocks, while in the Hong Kong market, the participation of Shanghai investors increases the volatility. The finding of this cross-market variation is consistent with the heterogeneity of investors’ trading behavior across different markets and reflects the existence of risk spillovers between those two markets. The price revaluation and risk spillovers illustrate that the implementation of the program has greatly improved the efficiency of the Chinese market.

    Abstract

    We study the effect of the Shanghai-Hong Kong Stock Connect program on market efficiency in China. Applying a difference-in-differences model, we find that connected firms experience a higher about 4% price impact and significantly increased turnover, liquidity, and volatility in 20 days following the announcement. Our results support the evidence that investors demand a premium for volatility risk. Furthermore, in the Shanghai market, the participation of Hong Kong investors helps reduce the volatility of connected stocks, while in the Hong Kong market, the participation of Shanghai investors increases the volatility. The finding of this cross-market variation is consistent with the heterogeneity of investors’ trading behavior across different markets and reflects the existence of risk spillovers between those two markets. The price revaluation and risk spillovers illustrate that the implementation of the program has greatly improved the efficiency of the Chinese market.
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    • References(25)
  • [1]
    Fernandes N, Ferreira M A. Does international cross-listing improve the information environment? Journal of Financial Economics, 2008, 88(2): 216-244.
    [2]
    Foerster S R, Karolyi G A. The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the United States. The Journal of Finance, 1999, 54(3): 981-1013.
    [3]
    Bekaert G, Harvey C R. Emerging equity market volatility. Journal of Financial Economics, 1997, 43(1): 29-77.
    [4]
    Bae K H, Chan K, Ng A. Investibility and return volatility. Journal of Financial Economics, 2004, 71(2): 239-263.
    [5]
    Umutlu M, Akdeniz L, Altay-Salih A. The degree of financial liberalization and aggregated stock-return volatility in emerging markets. Journal of Banking & Finance, 2010, 34(3): 509-521.
    [6]
    Li D, Nguyen Q N, Pham P K, et al. Large foreign ownership and firm-level stock return volatility in emerging markets. Journal of Financial and Quantitative Analysis, 2011, 46(4): 1127-1155.
    [7]
    Kim E H, Singal V. Stock market openings: Experience of emerging economies. The Journal of Business, 2000, 73(1): 25-66.
    [8]
    Chen Z, Du J, Li D,et al. Does foreign institutional ownership increase return volatility? Evidence from China. Journal of Banking & Finance, 2013, 37(2): 660-669.
    [9]
    Bekaert G, Harvey C R. Foreign speculators and emerging equity markets. The Journal of Finance, 2000, 55(2): 565-613.
    [10]
    Baker H K, Nofsinger J R, Weaver D G. International cross-listing and visibility. Journal of Financial and Quantitative Analysis, 2002, 37(3): 495-521.
    [11]
    Chan M K, Kwok S. Risk-sharing, market imperfections, asset prices: Evidence from China’s stock market liberalization. Journal of Banking & Finance, 2017, 84: 166-187.
    [12]
    Levine R, Zervos S. Capital control liberalization and stock market development. The World Bank, 1999.
    [13]
    Lesmond D A. Liquidity of emerging markets. Journal of Financial Economics, 2005, 77(2): 411-452.
    [14]
    Bekaert G, Harvey C R, Lundblad C. Liquidity and expected returns: Lessons from emerging markets. The Review of Financial Studies, 2007, 20(6): 1783-1831.
    [15]
    Stulz R M. International portfolio flows and security markets. In: International Capital Flows. Chicago: University Chicago Press, 1999: 257-293.
    [16]
    Rhee S G, Wang J. Foreign institutional ownership and stock market liquidity:Evidence from Indonesia. Journal of Banking & Finance, 2009, 33(7): 1312-1324.
    [17]
    Shleifer A. Do demand curves for stocks slope down? The Journal of Finance, 1986, 41(3): 579-590.
    [18]
    Beneish M D, Whaley R E. An anatomy of the “S&P Game”: The effects of changing the rules. The Journal of Finance, 1996, 51(5): 1909-1930.
    [19]
    Lynch A W, Mendenhall R R. New evidence on stock price effects associated with changes in the S&P 500 index. The Journal of Business, 1997, 70(3): 351-383.
    [20]
    Wurgler J, Zhuravskaya E. Does arbitrage flatten demand curves for stocks? The Journal of Business, 2002, 75(4): 583-608.
    [21]
    Chen H, Noronha G, Singal V. The price response to S&P 500 index additions and deletions: Evidence of asymmetry and a new explanation. The Journal of Finance, 2004, 59(4): 1901-1930.
    [22]
    Merton R C. A simple model of capital market equilibrium with incomplete information. Journal of Finance, 1987, 42(3): 483-510.
    [23]
    Harris L, Gurel E. Price and volume effects associated with changes in the S&P500 list: New evidence for the existence of price pressures. The Journal of Finance, 1986, 41(4): 815-829.
    [24]
    Amihud Y. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 2002, 5(1): 31-56.
    [25]
    Vayanos D. Flight to quality, flight to liquidity, and the pricing of risk. Cambridge, MA: Sloan School of Management, MIT, 2004.
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    [1]
    Fernandes N, Ferreira M A. Does international cross-listing improve the information environment? Journal of Financial Economics, 2008, 88(2): 216-244.
    [2]
    Foerster S R, Karolyi G A. The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the United States. The Journal of Finance, 1999, 54(3): 981-1013.
    [3]
    Bekaert G, Harvey C R. Emerging equity market volatility. Journal of Financial Economics, 1997, 43(1): 29-77.
    [4]
    Bae K H, Chan K, Ng A. Investibility and return volatility. Journal of Financial Economics, 2004, 71(2): 239-263.
    [5]
    Umutlu M, Akdeniz L, Altay-Salih A. The degree of financial liberalization and aggregated stock-return volatility in emerging markets. Journal of Banking & Finance, 2010, 34(3): 509-521.
    [6]
    Li D, Nguyen Q N, Pham P K, et al. Large foreign ownership and firm-level stock return volatility in emerging markets. Journal of Financial and Quantitative Analysis, 2011, 46(4): 1127-1155.
    [7]
    Kim E H, Singal V. Stock market openings: Experience of emerging economies. The Journal of Business, 2000, 73(1): 25-66.
    [8]
    Chen Z, Du J, Li D,et al. Does foreign institutional ownership increase return volatility? Evidence from China. Journal of Banking & Finance, 2013, 37(2): 660-669.
    [9]
    Bekaert G, Harvey C R. Foreign speculators and emerging equity markets. The Journal of Finance, 2000, 55(2): 565-613.
    [10]
    Baker H K, Nofsinger J R, Weaver D G. International cross-listing and visibility. Journal of Financial and Quantitative Analysis, 2002, 37(3): 495-521.
    [11]
    Chan M K, Kwok S. Risk-sharing, market imperfections, asset prices: Evidence from China’s stock market liberalization. Journal of Banking & Finance, 2017, 84: 166-187.
    [12]
    Levine R, Zervos S. Capital control liberalization and stock market development. The World Bank, 1999.
    [13]
    Lesmond D A. Liquidity of emerging markets. Journal of Financial Economics, 2005, 77(2): 411-452.
    [14]
    Bekaert G, Harvey C R, Lundblad C. Liquidity and expected returns: Lessons from emerging markets. The Review of Financial Studies, 2007, 20(6): 1783-1831.
    [15]
    Stulz R M. International portfolio flows and security markets. In: International Capital Flows. Chicago: University Chicago Press, 1999: 257-293.
    [16]
    Rhee S G, Wang J. Foreign institutional ownership and stock market liquidity:Evidence from Indonesia. Journal of Banking & Finance, 2009, 33(7): 1312-1324.
    [17]
    Shleifer A. Do demand curves for stocks slope down? The Journal of Finance, 1986, 41(3): 579-590.
    [18]
    Beneish M D, Whaley R E. An anatomy of the “S&P Game”: The effects of changing the rules. The Journal of Finance, 1996, 51(5): 1909-1930.
    [19]
    Lynch A W, Mendenhall R R. New evidence on stock price effects associated with changes in the S&P 500 index. The Journal of Business, 1997, 70(3): 351-383.
    [20]
    Wurgler J, Zhuravskaya E. Does arbitrage flatten demand curves for stocks? The Journal of Business, 2002, 75(4): 583-608.
    [21]
    Chen H, Noronha G, Singal V. The price response to S&P 500 index additions and deletions: Evidence of asymmetry and a new explanation. The Journal of Finance, 2004, 59(4): 1901-1930.
    [22]
    Merton R C. A simple model of capital market equilibrium with incomplete information. Journal of Finance, 1987, 42(3): 483-510.
    [23]
    Harris L, Gurel E. Price and volume effects associated with changes in the S&P500 list: New evidence for the existence of price pressures. The Journal of Finance, 1986, 41(4): 815-829.
    [24]
    Amihud Y. Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 2002, 5(1): 31-56.
    [25]
    Vayanos D. Flight to quality, flight to liquidity, and the pricing of risk. Cambridge, MA: Sloan School of Management, MIT, 2004.
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