Explaining Share Price Disparity with Parameter Uncertainty: Evidence from Chinese A- and H-Shares
Journal of Banking and Finance , Vol. 37, (2013), pp. 1073-1083
Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 33/2011
11 Pages Posted: 26 Oct 2011 Last revised: 22 Jul 2022
Date Written: April 21, 2013
Abstract
This working paper was written by Tsz-Kin Chung (Hong Kong Monetary Authority), Ka-Fai Li (Hong Kong Monetary Authority) and Cho-Hoi Hui (Hong Kong Monetary Authority).
The price disparity between the A- and H-share markets for dual-listed firms in China is one of the most intriguing puzzles in the mainland and Hong Kong financial markets. In this paper, we revisit this price disparity puzzle using the channel of parameter uncertainty. In the presence of information asymmetry and market segmentation, investors have different views on a firm's asset volatility, and hence different valuations of the same reference firm. We estimate a structural model for equity pricing using a Bayesian approach, in which the uncertainty of investor model parameters is represented by the posterior standard deviation of the firm's asset volatility. Our regression analysis shows that in addition to other market-based and macro factors, parameter uncertainty explains variations in price disparity.
Keywords: Market Segmentation, A and H Shares, Uncertainty
JEL Classification: C11, G13, G32
Suggested Citation: Suggested Citation
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