Information transmission between a shares and H Shares in the Chinese stock markets

Abstract

It is well known that exchange-listed companies in China issue two types of securities, A shares that only local investors can trade and B shares that only foreign investors can trade. But an additional security, known as the H share, has traded on the Stock Exchange of Hong Kong since 1993. Previous research shows that rational A-share investors condition their trading decisions on the previous price movements of B shares probably because foreign investors receive news about China faster than domestic Chinese investors. Our study extends the research to examine the cross-autocorrelation between A shares and H shares. We find that H shares lead A shares only for firn1s with high volatility of returns on H shares. Following days when one of the exchanges is closed, the cross-autocorrelations between A shares and H shares increase and more interestingly, the price movements of H shares arc positively correlated with past price changes of A shares We explain the results using rational imperfect information model.