Market Linkage for Dual-Listed Chinese Stocks

Only Chinese firms with the best financial integrity and corporate governance can be dually listed on the Hong Kong Exchange as H-shares or red chips and listed in the United States in the form of American Depository Receipts (ADRs). Dual listing for People's Republic of China (PRC) firms indicates their ability to attract international investors and to become international securities market participants. Using a bivariate generalized autoregressive conditional heteroscedasticity model, we examine patterns of information flows related to both pricing and volatility spillover across markets. Results indicate a significant mutual feedback of information between Hong Kong-listed stocks and ADRs. The Hong Kong market appears to play a more important role in influencing the pricing of corresponding companies in the U.S. market, whereas both markets are similarly influential to the volatility spillover. This finding is useful for foreign investment banking and financial services firms operating in China that need to understand the dual market performance of top PRC stocks.