The impact of market trading mechanism on A-H share price premium

ABSTRACT

After the Shanghai-Hong Kong Stock Connect policy was launched, markets become integrated, while A-H premium rises. This phenomenon is contrary to the existing market segmentation hypotheses. We provide a supplementary explanation for the A-H share price premium based on stock market trading mechanism. As margin trading and securities lending mechanism in Chinese mainland stock market is still immature and incomplete, limited arbitrage and asymmetric margin buying power amplifies the A-H premium even after markets are integrated. Our findings complement the financial microstructure researches on how trading mechanism may influence the dynamic price discovery process, especially those related to issues of short constraints and levered investing.

KEYWORDS:

• Shanghai-Hong Kong Stock Connect
• margin trading
• securities lending
• market segmentation

JEL CLASSIFICATION:

• G12
• G14
• G15
• G18

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71271136]; Shanghai Summit Plan For Economics [2018950943].