Explaining Disparities in AH Stock Premium Returns with Chinese Economic Policy Uncertainty: Evidence Based on a Non-Parametric Analysis
Mohib Ur Rahman*, Bing Xu*, Yuan Xiao*, and Wen-Tsung Lai**
*Research Institute of Quantitative Economics, Zhejiang Gongshang University
18 Xuezheng Road, Xiasha University Town, Hangzhou, Zhejiang 310018, China
**Yu Da University of Science and Technology
No.168, Hsueh-fu Road, Tanwen Village, Chaochiao Township, Miaoli County 361, Taiwan
This paper empirically investigates the AH share premium puzzle considering the impact of economic policy uncertainty (EPU) in China, using Hang Seng AH premium (HSAHP) index data from March 2011 to June 2018. Specifically, the index of Baker, Bloom, and Davis is used as a proxy for EPU in China. The data has been divided into two periods: 0 and 1. Period 0 includes data before the launch of the stock connect program and spans from March 2011 to October 2014, while period 1 represents data from after the launch of stock connect program and spans from November 2014 to June 2018. To more robustly test the change in AH premiums after the “connect” is launched; we evaluate the impact of Chinese EPU using non-parametric kernel density estimation. The empirical results show that parameter uncertainty explains variations in price disparity and can significantly reduce the returns of the AH share premium index.
-  F. A. Adjei and M. Adjei, “Economic policy uncertainty, market returns and expected return predictability,” J. of Financial Economic Policy, Vol.9, No.3, pp. 242-259, 2017.
-  G. Zhang, J. Han, Z. Pan, and H. Huang, “Economic policy uncertainty and capital structure choice: Evidence from China,” Economic Systems, Vol.39, No.3, pp. 439-457, 2015.
-  S. R. Baker, N. Bloom, and S. J. Davis, “Measuring Economic Policy Uncertainty,” Chicago Booth Research Paper, No.13-02, 2013.
-  B. S. Bernanke, “Irreversibility, uncertainty, and cyclical investment,” The Quarterly J. of Economics, Vol.98, No.1, pp. 85-106, 1983.
-  J. Fernández-Villaverde, P. Guerrón-Quintana, K. Kuester, and J. Rubio-Ramírez, “Fiscal Volatility Shocks and Economic Activity,” American Economic Review, Vol.105, No.11, pp. 3352-3384, 2015.
-  S. R. Baker, N. Bloom, and S. J. Davis, “Has economic policy uncertainty hampered the recovery?,” Government Policies and the Delayed Economic Recovery, Hoover Institution Press, 2012.
-  S. R. Baker, N. Bloom, and S. J. Davis, “Measuring economic policy uncertainty,” The Quarterly J. of Economics, Vol.131, No.4, pp. 1593-1636, 2016.
-  Q. Chi and W. Li, “Economic policy uncertainty, credit risks and banks’ lending decisions: Evidence from Chinese commercial banks,” China J. of Accounting Research, Vol.10, No.1, pp. 33-50, 2017.
-  F. Li and M. Yang, “Can Economic Policy Uncertainty Influence Corporate Investment? The Empirical Research by Using China Economic Policy Uncertainty Index,” J. of Financial Research, Vol.4, pp. 115-129, 2015.
-  M. D. Bordo, J. V. Duca, and C. Koch, “Economic policy uncertainty and the credit channel: Aggregate and bank level US evidence over several decades,” J. of Financial Stability, Vol.26, pp. 90-106, 2016.
-  J. Brogaard and A. Detzel, “The asset-pricing implications of government economic policy uncertainty,” Management Science, Vol.61, No.1, pp. 3-18, 2015.
-  N. Antonakakis, I. Chatziantoniou, and G. Filis, “Dynamic co-movements of stock market returns, implied volatility and policy uncertainty,” Economics Letters, Vol.120, No.1, pp. 87-92, 2013.
-  A. Ozoguz, “Good Times or Bad Times? Investors’ Uncertainty and Stock Returns,” The Review of Financial Studies, Vol.22, No.11, pp. 4377-4422, 2009.
-  M. Dzielinski, “Measuring economic uncertainty and its impact on the stock market,” Finance Research Letters, Vol.9, No.3, pp. 167-175, 2012.
-  S. Bhagat, P. Ghosh, and S. P. Rangan, “Economic policy uncertainty and economic growth in India,” Indian Institute of Management Bangalore Research Paper, No.407, 2013.
-  W. Kang and R. A. Ratti, “Oil shocks, policy uncertainty and stock market return,” J. of Int. Financial Markets, Institutions and Money, Vol.26, pp. 305-318, 2013.
-  M. Arouri, C. Estay, C. Rault, and D. Roubaud, “Economic policy uncertainty and stock markets: Long-run evidence from the US,” Finance Research Letters, Vol.18, pp. 136-141, 2016.
-  M. Balcilar, R. Gupta, C. Kyei, and M. E. Wohar, “Does economic policy uncertainty predict exchange rate returns and volatility? Evidence from a nonparametric causality-in-quantiles test,” Open Economies Review, Vol.27, No.2, pp. 229-250, 2016.
-  N. Bloom, “The impact of uncertainty shocks,” Econometrica, Vol.77, No.3, pp. 623-685, 2009.
-  W. Kang, K. Lee, and R. A. Ratti, “Economic policy uncertainty and firm-level investment,” J. of Macroeconomics, Vol.39, Part A, pp. 42-53, 2014.
-  H. Mumtaz and F. Zanetti, “The impact of the volatility of monetary policy shocks,” J. of Money, Credit and Banking, Vol.45, No.4, pp. 535-558, 2013.
-  A. Carriero, H. Mumtaz, K. Theodoridis, and A. Theophilopoulou, “The impact of uncertainty shocks under measurement error: A proxy SVAR approach,” J. of Money, Credit and Banking, Vol.47, No.6, pp. 1223-1238, 2015.
-  A. K. Dixit and R. S. Pindyck, “Investment under uncertainty,” Princeton University Press, 1994.
-  P. T. Hietala, “Asset pricing in partially segmented markets: Evidence from the Finnish market,” The J. of Finance, Vol.44, No.3, pp. 697-718, 1989.
-  W. Bailey, Y. P. Chung, and J.-K. Kang, “Foreign Ownership Restrictions and Equity price Premiums: Explaining the High Cost of International Diversification,” A. Gary Anderson Graduate School of Management, University of California, 1997.
-  W. Bailey, Y. P. Chung, and J.-K. Kang, “Foreign ownership restrictions and equity price premiums: what drives the demand for cross-border investments?,” J. of Financial and Quantitative Analysis, Vol.34, No.4, pp. 489-511, 1999.
-  J. Chen, F. Jiang, and G. Tong, “Economic policy uncertainty in China and stock market expected returns,” Accounting & Finance, Vol.57, No.5, pp. 1265-1286, 2017.
-  N. H. Anderson, P. Hall, and D. M. Titterington, “Two-sample test statistics for measuring discrepancies between two multivariate probability density functions using kernel-based density estimates,” J. of Multivariate Analysis, Vol.50, No.1, pp. 41-54, 1994.
-  T. Yingping, “Application of non-parameter kernel density method to the estimation of individual loss distribution,” Statistical Research, Vol.8, No.008, 2003.
-  S. Bekiros and R. Gupta, “Predicting stock returns and volatility using consumption-aggregate wealth ratios: a nonlinear approach,” Economics Letters, Vol.131, pp. 83-85, 2015.
-  H. Yan, “Essays on cross-list price disparity and market efficiency in emerging market,” Rutgers University Graduate School Newark, 2015.
-  S. S. Wang and L. Jiang, “Location of trade, ownership restrictions, and market illiquidity: Examining Chinese A-and H-shares,” J. of Banking & Finance, Vol.28, No.6, pp. 1273-1297, 2004.
-  Y. Li, D. Yan, and J. Greco, “Market segmentation and price differentials between A shares and H shares in the Chinese stock markets,” J. of Multinational Financial Management, Vol.16, No.3, pp. 232-248, 2006.
-  L. Guo, L. Tang, and S. X. Yang, “Corporate governance and market segmentation: evidence from the price difference between Chinese A and H shares,” Review of Quantitative Finance and Accounting, Vol.41, No.2, pp. 385-416, 2013.
-  L. Liu and T. Zhang, “Economic policy uncertainty and stock market volatility,” Finance Research Letters, Vol.15, pp. 99-105, 2015.
-  O. Lieberman, U. Ben-Zion, and S. Hauser, “A characterization of the price behavior of international dual stocks: an error correction approach,” J. of Int. Money and Finance, Vol.18, No.2, pp. 289-304, 1999.
-  C. S. Eun and S. Sabherwal, “Cross-border listings and price discovery: Evidence from U.S.-listed Canadian stocks,” The J. of Finance, Vol.58, No.2, pp. 549-575, 2003.
-  R. Pascual, B. Pascual-Fuster, and F. Climent, “Cross-listing, price discovery and the informativeness of the trading process,” J. of Financial Markets, Vol.9, No.2, pp. 144-161, 2006.
-  B. Frijns, A. Gilbert, and A. Tourani-Rad, “The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand,” J. of Banking & Finance, Vol.34, No.3, pp. 498-508, 2010.
-  S. Li, P. Brockman, and R. Zurbruegg, “Cross-listing, firm-specific information, and corporate governance: Evidence from Chinese A-shares and H-shares,” J. of Corporate Finance, Vol.32, pp. 347-362, 2015.
-  S. Chakravarty, A. Sarkar, and L. Wu, “Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares,” J. of Int. Financial Markets, Institutions and Money, Vol.8, No.3-4, pp. 325-356, 1998.
-  P. Wang, “Foreign institutional investor trading in Chinese A-share markets,” Managerial Finance, Vol.40, No.10, pp. 1007-1023, 2014.
-  T. Wu and X. Gao, “Factors of Price Difference between A-Shares and H-Shares under SH-HK Stock Connect,” Proc. of the Int. Conf. on Transnational Corporations and Emerging Markets, pp. 111-120, 2015.
-  D. R. Hyslop and D. C. Maré, “Understanding New Zealand’s changing income distribution, 1983-1998: A semi-parametric analysis,” Economica, Vol.72, No.287, pp. 469-495, 2005.
-  M. Liu, “The analysis of A/H premium,” 2017 Int. Conf. on Financial Management, Education and Social Science (FMESS 2017), pp. 300-306, 2017.
This article is published under a Creative Commons Attribution-NoDerivatives 4.0 International License.