Cross-autocorrelation between a shares and b shares in the chinese stock market

AbstractListed companies in China, upon meeting certain requirements, can issue two types of shares: A shares and B shares. Local investors in China can only buy and sell A shares, while foreign investors can only buy and sell B shares. We argue that foreign investors may receive news about China faster than domestic Chinese investors because of information barriers in China. Since foreigners participate in the B‐share market, the price movements of B shares should reflect the common information that the foreigners have. Rational A‐share investors can therefore condition their trading decisions on the previous price movements of B shares. As a result, returns on B shares should lead the returns on A shares. Using daily prices of A and B shares, we demonstrate that returns of B shares are correlated with those of A shares and that this correlation depends on the information transmission mechanism at work. The pattern of the asymmetric cross‐autocorrelation is robust to the inclusion of lagged realized returns and trading volumes.