A Study On Market Integration And Price Relation Of A-share And H-share Market

Market segmentation has been a common phenomenon on each emerging capital market,not to mention A-share market.The integration and pricing relationship issues of A-share snd H-share market have been concerned by both the Chinese academic field and investment field during the last twenty years,and due to the accelerating development and regulating open-up of A-share market,studies on the integration and pricing relationship of A-share and H-share market are becoming particularly important.After China's accession to WTO, A-share market internationalization process has been further accelerated.With a variety of financial product,policy and mechanism innovations been introduced,the original pattern of the A-share market is in the process of evolving.In december 2002, Qualified Foreign Institutional Investors mechanism has officially been introduced.And Qualified Domestic Institutional Investors mechanism has been put on stage in 2006.The openness of the A-share market has improved significantly,.There is a channel of mutual investment between China's domestic and foreign residents.The relationship between A-share market and international financial markets had never been more closer.After several years of development, at the end of 2010, the total scall of QFⅡand QDⅡhave reached＄19,720,000,000 and＄68,361,000,000 respectively. Hong Kong,as the nearest international financial center to the mainland,shares a similar origion of cultural background and political system with the mainland,and Hong Kong stock market is the most important market for Chinese mainland enterprises oversea listing and financing.After the violent ups and downs causing by the share reform and he U.S. subprime mortgage crisis in 2006,A-share market is going into a relatively stable period.Under this new situation, new issues also emerge:if the A-share market's degree of openness has increased,if the integration relationship between A-share and H-share markets has improved,and which one of the two markets imposes a dominant powver on stock pricing.The main contents are as follows:Section I intends to give a brief introduction on the research background and study significance.In this part,I make a list of literatures that aim at the integration and pricing relationship of A-share and H-share market in order to form a clear idea of this paper. Section II gives a brief discussion on the development of A-share market and its current relationship with H-share market.After descriptive analysis,it shows that the two markets have not achieved complete free flow of information.There are differences between the two market that will still cause market segmentation and pricing problem.In the follow sections,DGM model,GS model and Granger causality test will be introduced to lauch an empirical test of these two issues.The next two sections are the key part of this paper. Section III uses the idea of DGM model,considering the characteristics of A shares and H shares,to build a model testing the market integration of the two markets.The empirical test uses 23 companies'daily stock closing prices and trading volume from 2003 to 2010,and separates the whole sample into three groups in accordance with the share reform and the U.S. subprime mortgage crisis.The results indicate that during 2003-2005,there is a strong degree of segmentation between A-share and H-share market.Information flow is poor, and linkages between the two markets are weak. After 2006, thankes to the implementation of stock reform and the introduction of QFII and QDII mechanisms,the flow of information between the two markets becomes increasingly convenient and the degree of integration becomes increasingly high, but the market segmention phenomenon still remains.Section IV uses the idea of GS model,with the same sample in section III,to build a model testing the pricing relationship between the two markets.And in order to improve the accuracy of the results.I also use Granger causality test as a supplementary test.The results indicate that during 2003-2005,GS model empirical test results are far from significant and Granger causality test results show no relationship,wmich means that A-share and H-share market are still separated from each other.After 2006,both tests results improved significantly,which means that the relationship between the two markets is getting closer.This is correspond to the conclusion in section III.As for the pricing part,it seems that during 2003-2005,each market has its own pricing power;during 2006-2007,the two markets begin to have some influence on each other,but A-share market does not get an dominance on pricing;during 2008-2010,the influence on each other's stock pricing becomes bigger,but A-share market still doesn't get an dominance on pricing.Section V gives an overall analysis of the results of empirical tests and offers some policy recommendations:perfect the securities market laws and regulations,cultivate and develop domestic institutional investors, encourage financial innovations and gradually relax the control of the capital markets. The author also pointed out the short of this study and further research directions.This paper's innovations can be reflected as follows:First, the sample is separated into three groups, since the full implementation of QFII system,in order to campare the performance of each group.Second, learning from Kenneth D. Garbade and William L. Silber (1979),and creatively introduces some changes into GS model according to A-share and H-share market actual situation.Third, the majority of literatures on A-share and H-share market integration and pricing issues use market index as variable,while in this paper daily stock price has been used.