Empirical Analysis Of China’s A-H Share Price Disparity

The essay focuses on analyzing the factors influencing China’s A-H share price disparity, using monthly trading data of A+H multi-listed firms from January 2004 to December 2014. For the empirical analysis, panel data regression model is chosen. Firstly, the article examines the explanation power of the 4 classic theories proposed by foreign scholars, namely information asymmetry hypothesis, liquidity difference hypothesis, risk preference difference hypothesis and demand difference hypothesis. Empirical results show that the information asymmetry as well as liquidity difference theory has strong influence on A-H share price disparity. However, for examining the risk preference difference hypothesis, the regression outcome is opposite to the hypothesis, which suggests that investors in A-share market are actually risk averse. The proxy variable of demand difference is insignificant, meaning that as all the A-shares are outstanding, the demand difference between A-shares and H-shares is not significant. Secondly, considering the special development of China’s stock market, several variables representing market factors, institutional factors and capital flow factors are included in the regression model. Empirical results are shown as follows: A and H share market trends and also the reform of exchange rate have significant explanatory power to the A-H share disparity, but the influence of risk-free rate is not significant; for institutional factors, the split share structure reform has increased the effectiveness of A-share market, while short-selling has limited impact on reducing A-H share premium; in terms of capital flow factors, it is QFII not QDII that helps narrow the price gap; in the meantime, the transaction of related financial products can affect the price disparity but the influence is reduced due to the limits of arbitrage in A-share market. To conclude, as the objective differences between A-share and H-share stock market are gradually disappearing, subjective factors have become the main reason for A-H share price disparity. Furthermore, as the mainland stock market and investors are becoming more and more mature, hopefully the A-H share price disparity will be narrowed to a reasonable level in the future.