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The Impact of the Shanghai-Hong-Kong Stock Connect Program on the Liquidity of Shanghai A-Shares

Lefebvre, Maxime
(2016)

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Lefebvre_Maxime_53511100_2016.pdf
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Lefebvre_Maxime_53511100_2016_Annexe.pdf
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Details

Supervisors
Grégoire, Philippe
Faculty
Louvain School of Management
Degree label
Master [120] en sciences de gestion
Abstract
Market liquidity has a central role in many areas of finance and has been studied in depth, both in order to identify its sources and to find out its impacts. The first aspect generally touches the area of market microstructure. In this paper, we broadly review the existing literature related to the microstructure approach to liquidity and discuss various ways to measure it. We also detail the impact of the Shanghai-Hong Kong Stock Connect Program (here-after denominated the Program) on the liquidity of A-shares traded in the Shanghai Stock Exchange (SSE). The Program allows Hong Kong investors to trade Shanghai A-shares directly through their broker in Hong Kong – and reversely from Hong Kong to Shanghai which constitutes a new step in the opening of Chinese stock markets to foreign investors. We then test the impact of the program in term of intraday patterns of liquidity measured as bid-ask spread, depth and trading volume using graphical exploration and linear regressions on 104 A-shares during two periods of 20 days using intraday minute-by-minute data. The key findings show that liquidity is slightly better for stocks included in the program. In addition, we observe L-shaped patterns of spread for both the stocks included in the program, and those not included in it. Regarding depth, we find out different results for stocks in- and out-the Stock Connect Program. Depth of stocks part of it follows an inverted L-shaped pattern while depth of stocks out of the program follows a U-shaped pattern. In addition, trading volume of all stocks follows a U-shaped pattern. All the patterns mentioned are explained by the market microstructure theory (order handling, inventory management and asymmetric information costs). Finally, we conclude that stocks included in the program exhibit better market liquidity and different trading behavior without being able to affirm that the program can solely explain those differences.