Research On The Effect Of Shanghai Tong On The Liquidity And Return Of The Underlying Stocks In Shanghai Stock Exchange

Shanghai stock trading opened at November 17,2014,which is the milestone event of the docking of the Chinese capital market with the international capital market.It is the most important step in the internationalization strategy of the qualified foreign institutional investors(QFII)policy.It is an important leader for the internationalization of China’s capital market and the direction of the RMB effect.However,the financial market changes,the implementation of the policy is not known,So investors and related scholars focus on the analysis of this policy after the event,the main value of solving the problem lie in: First,providing a realistic reference for the Policy makers to adjust the policy;second,providing a valuable experience for the further opening up of the financial market;third,providing a better method for us to comprehend classical financial theory,while testing whether these theories could also work well in analyzing the China stock market.In this background,based on the events of the opening up of Shanghai-Hong Kong Stock Connect program,this paper analysis the changes of the the liquidity and profitability of Shanghai Stock Exchange in short term and long term,so as to provide policy recommendations to the reform of China’s capital market.Specific research ideas are as follows:First of all,based on the existing literature,this paper give a in-depth study of the theoretical and practical significance of works about the effects of the opening up of Shanghai-Hong Kong Stock Connect program on the Shanghai stock liquidity and profitability.Secondly,this paper give a further analysis to the effects of the events on liquidity and profitability of the Shanghai stock,observing whether there is a significant increase in the liquidity and existence of abnormal returns.At the same time,this paper analysis the reasons of the changes on liquidity and profitability due to the event.Finally,taking advantage of changes of the sample during this period,this paper also test the suitability of the liquidity premium theory in China Stock Market in the method of both time series regression and cross-sectional regression.As for research method,this paper use ILRIQ and turnover ratio as proxy variable of the liquidity.At the same time,average transaction ratio(MVR)is used to observe the liquidity without the influence of market factors.Finally,in order to find what lead to the change of the liquidity,time series regression is used on the related sample.In terms of returns,Event study method is employed to detect the notable abnormal returns caused by the events.Finally,this paper compare time series regression and cross-sectional regression in the application of testing the phenomenon of liquidity premium due to the event.In conclusion: First,there was a significant negative abnormal return for both the 527 initial underlying stocks and the 28 underlying stocks that were added after December 15,2014,and the results were more in line with the concerns of more institutional investors.Concerns of institutional investors and transparency of information make the phenomenon of the high valuation weakened.Second,When considering market factors,liquidity measured by ILRIQ and Turnover Ratio are all markedly improved due to the opening up of Shanghai-Hong Kong Stock Connect program.However,When market factors are ignored,liquidity of both the 527 initial underlying stocks and the 28 underlying stocks that were added after December 15,2014 are notably decreased.Considering the entire paper,innovation points are divided into the following three points.First of all,catching the attention of investors in November 2014,Shanghai-Hong Kong Stock Connect program,the milestone event of the docking of the Chinese capital market with the international capital market,is a new research field,which was touched by little scholar.In this sense,this paper contribute much to this new topic.Secondly,when compared with other papers related to this topic,this paper does a further work in explaining what leads to the change after exploiting ILRIQ to detect the liquidity without the influence of market factors.Finally,Event study method is applied to test whether abnormal returns are resulted from the opening up of Shanghai-Hong Kong Stock Connect program,then in order to test the theory of liquidity premium,this paper also apply cross-sectional regression to abnormal returns.It is obviously a beneficial attempt to test the suitability of classical financial theory in China.