China's A And B Shares Correlation: An Analysis

In China , A and B shares can be issued by one company at the same time, and theyare traded with different currencies in different markets . This is so-called marketsegmentation problem.B-share price movement was relatively independent before it opened to domesticinvestors.It was neither connected with A-share nor related to overseas market. Itcould be said that B-share market was very inactive in this stage.The milestone of B-share market development occured on February 19,2001.Thatday, the China Securities Regulatory Commission announced that , approved by theState Council, they decided to allow residents to trade B-share with their legal foreignexchange. This good news immediately resulted in a crazy rise on B-share prices.After three months, however, B-share price suddenly fell and began a deep adjustment.During this period the most significant feature of B-share market was its increasinglyclose relationship with A-share market.This paper is in the background of China's stock market segmentation.The followingquestions are explained in this paper: Firstly, the change of B-share pricing modelafter B-share market opened. Secondly, the change of relationship between A and Bshare prices after market opened.Three important conclusions are drawn in this thesis. In the first place, B-sharepricing model changed after market opened. In the second place, A and B share priceswere increasingly associated with each other in both Shanghai and Shenzhen stockexchanges after B-share market opened. Last but not least, A and B share pricesshowed cointegration in Shenzhen stock exchange earlier than Shanghai.Several enlightenments are proposed in according to the above conclusions. Forexample, we should pay attention to more reasonable system settings so that investorscan be led to become rational by trading mechanism. Topics from the point of view of this paper are not new. In fact, the real significance of this paper is to investigate the intrinsic B-share pricing method and its relationship with A-share. Meanwhile, findings from this thesis can also provide a strong basis for residents' investment strategy.The innovation lies in the fact that new concept from new perspective is put forth in the paper. Firstly, behavior deviation is divided into two kinds, namely limited rational cognitive bias and system-induced cognitive bias. Secondly, psychological arbitrage is put forward in order to explain cointegration phenomenon appeared in the conclusions.