Abstract: The main focus of this paper is to test how Shanghai-Hong Kong (SH-HK) Stock Connect contributes to the price difference between A-shares and H-shares based on panel data of 53 A-H shares dual listed companies. The aim of this paper is not only to examine the effectiveness of the stock connect program, but also trigger reference significance for the launch of Shenzhen-Hong Kong (SZ-HK) Stock Connect. The paper includes three parts. Firstly, five important factors which influence the price difference between A-shares and H-shares are put forward. These are asymmetric information, liquidity, demandelasticity, risk preference and launch of SH-HK Stock Connect. Secondly, the panel data model is setup for running regressions. The result of empirical analysis indicates that the launch of SH-HK Stock Connect enlarges A-H shares price difference due to the limited investment quota, differential trading amount and short running period. In addition, the other four factors have negative relationship with price difference which is consistent with theoretic analysis. Finally, we recommend that government should improve SH-HK Stock Connect and advance the launch of SZ-HK Stock Connect; strengthen A-share investors’ education; speed up financial innovation and establish an effective mechanism of arbitrage.
Keywords: SH-HK Stock Connect, price difference, panel data model