The Price Difference And Arbitrage Decision Of Cross-listed Shares In The A And H Shares Market

China's securities market has already been of considerable importance as an emerging market, and the market value of shares ranks the third in the world. Recently, China's capital market has been progressively improved and opened. The government encourages enterprises in the Mainland China to list in overseas market; gradually increases the investment quantity of A-shares relating to the Qualified Foreign Institutional Investors (QFII); and ratifies the new Qualified Domestic Institutional Investors (QDII). In 2001, B-share market is open to individual investors of A-shares. Though the forthcoming margin trading and index futures, a number of measures are introduced to better the trading mechanism in A-share market. At the same time, the integration of the national and international capital market is boosted to some extent, and thus becoming a concern in the academia. At the moment, from the perspective of the limitations on capital transfer, the national and international market can be completely segmented. Only QFII and QDII are able to invest directly across markets. QDII are primarily interested in red chips in Hong Kong market. However, the burst of sub-prime crisis made the domestic investors in the Mainland China lose greatly. As a result, the research on the cross-market investment theory based on empirical evidence is of paramount significance.Cross-listed shares in A and H market are considered as the object of study in this project. The two general research questions in this study are as follows. First, theories relating to market segmentation in the literature are mainly concerned with the free capital flow across markets, with the foreign shares as premium; however, it is just the opposite in the AH market. Thus, can the current theories account for the premium of the cross-listed A-shares in relation to H-shares? Second, in general, price difference incurs arbitrage. In practice, nonetheless, the share transfer across markets is constrained. Thus, is there possibility of arbitrage regarding A-and H-shares? If possible, how can arbitrage strategies be implemented?In the light of these two questions mentioned above, Chapter 2 reviews and discusses the relevant theories of market segmentation; the theory of demand difference; the theory of information asymmetry; the theory of liquidity difference; and the theory of investment philosophy differences. On the basis of the characteristics of A and H market, a comprehensive framework has been established. The measurement of market segmentation is briefly discussed, together with the dynamic relationship between AH-shares from the profit perspectives. Because of the institutional obstacles in arbitrage across markets and with reference to the principles of the matching transaction in statistic arbitrage, we introduce the relevant theories and approaches in statistic arbitrage.The main body of our study is concerned with two important aspects:price difference and arbitrage strategies. Chapters 3 and 4 theoretically analyze the price difference of A and H shares on the basis of empirical evidence. In particular, Chapter 3 extends Chan's (2008) model, and we establish the equilibrium price model in the context of complete information and the equilibrium price model of H-share on the basis of information absorption ratio. In addition, we suggest that information absorption ratio might be another factor that affects AH-share price differences. Then, we verify that information absorption ratio has a non-linear impact on price difference and explore the influence of informed investors on the price difference. Finally, we analyze the effect of distinct market preferences coefficient on the price difference. Chapter 4 is based on empirical studies, and 55 AH-share listed companies are selected as samples. We analyze the affecting factors relating to AH-shares between 1 st January 2000 and 30th July 2008 based on the daily and weekly trading data. We propose a new index of measuring information asymmetry-information absorption degree. Illiquidity and price amplitude are deployed to measure liquidity and risk. Also, the panel data framework is used to test the hypothesis of information asymmetry, the hypothesis of liquidity, the hypothesis of risk difference and the hypothesis of demand difference. Building on this framework, we further consider the impact of investor preferences, interest rates, market returns on AH parity. Our main findings are as follows. Information asymmetry, liquidity differences, risk difference and demand difference suffice to account for AH parity. Nonetheless, the trading volume is in contradiction to the effect of the liquidity calculated from illiquidity (Amihud 2002) on AH parity, in which the impact of trading volume is consistent with our expectation. In addition, this study shows that company size is not an appropriate index to measure information asymmetry. It also demonstrates that variations of investor preferences can be considered as the principal factor affecting AH parity, and September 2002 is a cut-off point of preference variations.Because the AH-share transfer is constrained across markets and short sell trading has not been implemented in A-share market, cross-market arbitrage encounters institutional obstacles. This study borrows the early operations of American Hedge Funds, i.e., the thought of pairs trading, whose foundation is mean reversion. Thus, Chapter 5 designs the approach of nonlinear equilibrium to test mean reversion, confirming the possibility of arbitrage. The STAR model with twin variables are established to verify the ideal empirical conclusion deriving from mean reversion:the price variations of cross-listed A-and H-shares are non-linear; the speed of A-share reversion equilibrium is greater than that of H-shares. As a result, it is more likely to obtain arbitrage in A-share market than in H-share market. Alternatively, price discovery is more likely in A-share market. Grounded on the existence of arbitrary possibility, Chapter 6 specifically designs arbitrary strategies and we calculate the arbitrage yields and risks relating to 17 cross-listed companies. With reference to the statistic arbitrary framework (Chen 2002) and in consideration of short sell limitations in A-share market, we propose three arbitrage strategies:the FS strategy of equivalent shares, FP strategy of equivalent amount of money and OH strategy of the optimum hedge ratio. We analyze and calculate the price data of AH cross-listed companies. Our empirical studies show that the simplest FS strategy and FP strategy can yield better arbitrage yields, compared with the OH strategy. Even though short sell trading happens in A-share market, individual share might produce higher annual yields. Nevertheless, trading cost, price impingement and other factors are not considered in the above three arbitrary strategies. Short sell might be prohibited in Hong Kong market when prices are falling, which will constrain arbitrage. Consequently, the statistic arbitrary strategies in this study might be limited to some extent in actual practice.