The price premium of China A-shares over Hong Kong H-shares: A further visit of the liquidity hypothesis

Abstract

I examine the price premium between A-shares and H-shares using a sample of Hong Kong, Shenzhen, and Shanghai stock market intraday data in 2004. Following the market- microstructure approach, I reinvestigate the liquidity hypothesis by incorporating spread and depth. The study generates two important results. First, China A-shares on average provide better market liquidity than their Hong Kong H-share counterparts do. Second, after controlling for traditional liquidity measures and variables related to competing hypotheses, the percentage differences in quoted spread and depth between Ashares and H-shares still explain significantly the price premium. Endogeneity between spread and depth does not affect the major findings.