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Abstract
This paper extends prior cross-listing literature by examining the Chinese stocks triple-listed in Hong Kong Stock Exchange (SEHK), Shanghai Stock Exchange (SSE) and New York Stock Exchange (NYSE). We find that the returns of the triple-listed stocks and the indexes are co-integrated in the long-run across the three markets, indicating both an absence of arbitrage opportunities and long-term equilibrium. By employing the Granger Causality test, we found that the foreign market (NYSE) plays the dominant role in pnce discovery (where information is impounded into prices), therefore rejecting the home bias hypothesis that the home market generates the most useful information about pnce movement. While the stock returns of NYSE were able to influence the returns of both the SSE and the SEHK, the SSE market could not affect the NYSE and only on rare occasions affects the SEHK. The same methodology to examine the co-integration and price discovery were employed for 4 distinctive sub-periods: 2000-2003, 2003-2007, 2007-2009, and 2009-2013. It was found that while China was a relatively independent market prior to the financial crisis, its integration with the global markets has increased ever since.
Key Words: financial institution, co-integration, granger causality, asset pricing.
JEL Classification: G21, G01
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Introduction
The increasing integration of global stock markets and the dramatically growing numbers of cross-listed companies have made it necessary to discuss where information is impounded into stock prices (price discovery) and whether financial markets are co-integrated. In an efficient market, the price of an asset should be the same regardless of its listing location. This principle is enforced by the "no-arbitrage" argument. In financial economics, the law of one price ensures that two or more non-stationary economic series have similar movement in the longrun. This equilibrium phenomenon in the long-run is known as co-integration (Yagil and Qadan, 2012). To be specific, if the financial markets of different regions are co-integrated and one stock is listed in those markets simultaneously, there should not be any disparity in terms of prices and price movements (Koumkwa and Susmel, 2005).
The existence of Chinese companies, which are triple-listed on the SEHK, SSE, and NYSE, provides a perfect sample to study the co-integration of the US, Chinese, and Hong Kong financial markets and...