The Impact of Shanghai-Hong Kong Stock Connect on the Effectiveness of Price Limits in the Chinese Stock Market

Chong, Terence Tai Leung and Kwok, Stanley (2019): The Impact of Shanghai-Hong Kong Stock Connect on the Effectiveness of Price Limits in the Chinese Stock Market.

Abstract

Launched in 2014, the Shanghai-Hong Kong Stock Connect (SHSC) is the first mutual access channel between the Chinese and Hong Kong equity markets. The scheme allows Hong Kong and international investors to purchase eligible Shanghai-listed shares, while at the same time permitting eligible Chinese investors to purchase eligible Hong Kong-listed shares. This paper aims to examine the impact of the scheme on the effectiveness of the price limit rule, which is only imposed in China but not in Hong Kong. Results show that the scheme alleviates the delayed price discovery problem caused by price limits but has no significant effect on the problems of volatility spillover and trading interference.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock Connect; Price Limits; Price Discovery
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation

References

Burdekin, R.C.K., and Siklos, P.L. (2018). Quantifying the Impact of the November 2014 Shanghai-Hong Kong Stock Connect, CAMA Working Papers No. 9/2018. Canberra: Centre for Applied Macroeconomic Analysis.

Chang, C-H., and Hsieh, S-L. (2008). Is the daily price limits of the Taiwan Stock Exchange effective? Fundamentals of listed stocks and investors’ perception of fair price, Asia-Pacific Journal of Financial Studies, vol. 37, pp. 675–726.

Chen, G-M., Rui, O.M., and Wang, S.S. (2005). The effectiveness of price limits and stock characteristics: Evidence from the Shanghai and Shenzhen stock exchanges, Review of Quantitative Finance and Accounting, vol. 25, pp. 159–182.

Chong, T.T.L, D. Wang, and W. Chan (2016). Do Price Limits Increase Stock Market Volatility in China? Advances in Quantitative Analysis of Finance and Accounting, vol. 14, pp.263-286.

Fama, E.F. (1989). Perspectives on October 1987, or what did we learn from the crash? in Kamphuis, R.W. et al. (Eds.), Black Monday and the Future of the Financial Markets. Homewood, IL: Irwin, pp.71–82.

Fan, Q., and Wang, T. (2017). The impact of Shanghai–Hong Kong Stock Connect policy on A-H share price premium, Finance Research Letters, vol. 21, pp. 222–227.

Grossman, S.J. (1988). Program trading and market volatility: A report on interday relationships, Financial Analysts Journal, vol. 44, pp.18–28.

Huang, Y-S., Fu, T-W., and Ke, M-C. (2001). Daily price limits and stock price behavior: Evidence from the Taiwan stock exchange, International Review of Economics & Finance, vol. 10, pp. 263–288.

Huo, R., and Ahmed, A.D. (2017). Return and volatility spillovers effects: Evaluating the impact of Shanghai-Hong Kong Stock Connect, Economic Modelling, vol. 61, pp. 260–272.

Kim, K.A., and Rhee, S.G. (1997). Price limit performance: Evidence from the Tokyo Stock Exchange, The Journal of Finance, vol. 52, pp. 885–901.

Lauterbach, B., and Ben-Zion, U. (1993). Stock market crashes and the performance of circuit breakers: Empirical Evidence, The Journal of Finance, vol. 48, pp. 1909–1925.

Li, H., Zheng, D., and Chen, J. (2014). Effectiveness, cause and impact of price limit—Evidence from China's cross-listed stocks, Journal of International Financial Markets, Institutions and Money, vol. 29, pp.217–241.

Ma, C.K., Rao, R.P., and Sears, R.S. (1989). Volatility, price resolution, and the effectiveness of price limits, in Edwards, F.R. (Ed.), Regulatory Reform of Stock and Futures Markets. Dordrecht: Kluwer Academic Publishers, pp. 67–101.

Qu, W-Z. (2007). Impact of trading mechanism on China’s stock market efficiency: An empirical study of price limit, Journal of Xiamen University (Arts & Social Sciences), vol. 2007, pp. 40–47 (in Chinese).

Ruan, Q., Zhang, S., Lv, D., and Lu, X. (2018). Financial liberalization and stock market cross-correlation: MF-DCCA analysis based on Shanghai-Hong Kong Stock Connect, Physica A: Statistical Mechanics and its Applications, vol. 491, pp. 779–791.

Tian, H., and Cao, J-H. (2003). Some studies of the volatility and stock return on China stock markets using GARCH-M, Systems Engineering-Theory & Practice, vol. 23, pp. 81–86.

Wang, Q., and T.T.L. Chong (2018). Co-integrated or not? After the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connection Schemes" (with Qiyu Wang), Economics Letters, vol. 163, pp. 167-171.

Yeh, C-H., and Yang, C-Y. (2013). Do price limits hurt the market? Journal of Economic Interaction and Coordination, vol. 8, pp. 125–153.

Xu, J., and Zhang, S. (2014). The Fama-French three factors in Chinese Stock Market, China Accounting and Finance Review, vol. 16, pp. 210–227.

Zhang, Q., and Jaffry, S. (2015). High frequency volatility spillover effect based on the Shanghai-Hong Kong Stock Connect Program, Investment Management and Financial Innovations, vol. 12, pp. 8–15.