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The Journal of Portfolio Management

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The Revealed Inefficiencies of the China A-H Premium

Fujun Li, Xiaoyang Liu and Vivek Viswanathan
The Journal of Portfolio Management Non-US Financial Markets 2021, 47 (7) 150-161; DOI: https://doi.org/10.3905/jpm.2021.1.251
Fujun Li
is the head of Multi-Asset at CGB Wealth Management in Shanghai, China
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Xiaoyang Liu
is a senior vice president in research at Rayliant Global Advisors in Irvine, CA
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Vivek Viswanathan
is global head of research at Rayliant Global Advisors in Irvine, CA
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Abstract

The ratio of the price of a dual-listed A-share to the price of its corresponding H-share (the A-H premium) is persistent both in aggregate and cross-sectionally. The A-H premium for a given stock converges to a universal equilibrium A-H premium but more strongly to a stock-specific equilibrium A-H premium. The latter indicates different long-run investor preferences for different stocks in the onshore A-share market versus the offshore H-share market. The authors provide evidence that this differential is driven by the high retail investor participation in the China A-share market. They propose two new factors based on the divergence of a stock’s A-H premium from its universal and stock-specific equilibrium A-H premium. These two factors earn significant Fama–French three-factor alpha and earn alpha against each other. Lastly, the authors show that a dual-listed A-share is less efficiently priced than its H-share counterpart.

TOPICS: Security analysis and valuation, emerging markets, analysis of individual factors/risk premia

Key Findings

  • ▪ Chinese stocks that are dual-listed as A-shares and H-shares tend to have large, persistent A-share premiums relative to their H-share counterparts.

  • ▪ A strategy of increasing weight in firms with low A-H premiums and decreasing weight in firms with high A-H premiums tends to earn excess returns over a capitalization-weighted benchmark.

  • ▪ The A-H premium is driven primarily by inefficiencies in A-share pricing, caused by specific retail preferences from the largely retail A-share market.

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Vol. 47, Issue 7
Non-US Financial Markets 2021
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The Revealed Inefficiencies of the China A-H Premium
Fujun Li, Xiaoyang Liu, Vivek Viswanathan
The Journal of Portfolio Management Jun 2021, 47 (7) 150-161; DOI: 10.3905/jpm.2021.1.251

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The Revealed Inefficiencies of the China A-H Premium
Fujun Li, Xiaoyang Liu, Vivek Viswanathan
The Journal of Portfolio Management Jun 2021, 47 (7) 150-161; DOI: 10.3905/jpm.2021.1.251
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  • Article
    • Abstract
    • DATA
    • A-H PREMIUM PERSISTENCE
    • MODELING A-H DYNAMICS
    • INVESTOR PREFERENCES
    • PRICE INEFFICIENCIES IN CHINA A-SHARES
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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