Review of Quantitative Finance and Accounting, 18: 239–257, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Stock Returns and Volatility under Market
Segmentation: The Case of Chinese A and B Shares
Department of International Trade and Finance, Fu-Jen Catholic University, Taipei, Taiwan
Department of Finance, National Taiwan University, Taipei, Taiwan
Graduate Institute of Finance, Fu-Jen Catholic University, Taipei, Taiwan
Abstract. In most countries where ﬁrms list separate shares for trading by foreign and domestic investors, the
prices of the foreign shares tend to be higher. In China, the reverse tends to be true. In this paper, we would like
to focus on the information content in lagged premiums of Chinese A over B traded shares. The lagged premiums
are found to have certain predictive power over the future returns and volatility of both A and B shares, with some
interesting patterns. Speciﬁcally, an increase in the premium ratio of A shares will be followed by a rise in the
return of A shares and a fall in the return of B shares. It is found that both of the investors in Chinese A- and B-share
markets reveal positive feedback trading behavior. Moreover, the liquidity and information availability will affect
the magnitude of such behavior especially in B-share markets. By using multivariate GARCH model, it is also
demonstrated that the unexpected changes in the premium ratio of A-share price over B-share price contribute to
the return volatility of both A shares and B shares. These patterns may provide foundations for the development
of pricing models for equity shares under market segmentation.
Key words: market segmentation, positive feedback behavior, A shares, B shares, China stock markets
JEL Classiﬁcation: C32, G12, N25
Many countries divide their stock markets into a domestic board and a foreign board,
resulting in different prices for the same underlying shares. Prices on the foreign board
are higher than on the domestic board in most countries
(Thailand, Singapore, Finland
and Mexico). Bailey and Jagtiani (1994), Hietala (1989), Domowitz, Glen and Madhavan
(1997), and Lam (1997) documented and explained this phenomenon. However, in China,
the reverse tends to be true, the prices of foreign board (B shares) are signiﬁcantly lower than
their domestic board counterparts (A shares). After adjusting for exchange rates, A shares
enjoyed an average 70.3% (50.2%) premium over B shares on the Shanghai (Shenzhen)
Exchange between January 1995 and October 1997.
Address correspondence to: Yin-Hua Yeh, Department of International Trade and Finance, Fu-Jen Catholic
University, 242, Hsin-Chuang, Taipei, Taiwan. Tel.: +886-2-2903-1111 ext. 2725. Fax: +886-2-29019779.