Price Discovery Of Chinese Stock Market-Evidence From A And B Markets

The issue has been so long time that Chinese foreign stock has a much lower price compared with Chinese domestic stock, which is also unique for China. As time went by, the circumstances of foreign stock market and domestic stock market have changed a lot but the gap of their prices still exists, even has extended.This paper focuses on price discovery of A and B shares in Shanghai and Shenzhen stock exchanges in a long period. By empirical study of Lead-lag model, Permanent-Transitory model and Information Share model, I study the relationship of prices between A and B shares.There are five chapters in this paper. Chapter 1 introduces the definition of price discovery and literature in this field, and then shows a guideline of this paper.Chapter 2 introduces mechanism of price discovery from the view of economics, including demand and supply principle, participants' adjustment mechanism and information searching principle. From these theories I make some inferences about price discovery between A and B shares.Chapter 3 gives a whole idea of China's stock market by introducing its history, development process and present situation. Then I analyze market trend, volumes and turning-over-rate to shed lights on model design.Chapter 4 tests integration and cointegration of A and B shares. The results of integration indicate that the performance of stock returns satisfies GARCH process, and they promise cointegration tests, which ensure estimation of price discovery using P-T model and IS model.Chapter 5 describes three models and their empirical results. The conclusion is that A share has a significant advantage in price discovery compared with B share both with index and individual data, and their correlation has become closer and closer as time went by.The last chapter is conclusion and some investment suggestions.