Modeling Price Differentials between A Shares and H Shares on the Chinese Stock Market

Abstract: In this paper, we model the price differentials between A shares and H shares in the Chinese stock markets with both macroeconomic factors and firm specific factors, which successfully explain the A share price premium. Discounts of H-share prices relative to A-share prices are related to the contemporaneous movements of the H-share local market index relative to the A-share local market index, the spread of interest rates and inflation rates between Hong Kong and mainland China as well as firm size, liquidity and volatility of the stock. A share price premium has decreased after the launch of QFII which aims at integration of Chinese stock markets. However, we cannot conclude that these markets are integrated.