An Empirical Study on Market Segmentation and Information Diffusion in Chinese Stock Markets

Abstract: The efficacy and accuracy of information is very important for making decision in stock markets. In this paper, we study on the effect of information diffusion in Chinese stock market before and after the owership release in February 19, 2001, by testing the stationary of A share premium and cointegration between A and B share prices. The panel unit root tests we propose on A share premium are Augmented Dickey-Fullar (ADF) tests for individual firm and Fisher tests for the panel, based on combining pvalues from each individual cross-section. The panel cointegration tests on A and B shares we use is Johansen’s likelihood ratio tests for individual firm and likelihoodbased panel cointegraion tests for panel, based on combining the test statistics. The results show that before the opening of B share markets to domestic investors, A share premiums have a unit root and there is no cointegration relationship between A and B share markets. On the contrary, after ownership release, A share premium is stationary and there is cointegration relationship between A and B share markets.