Short-term reaction of stock markets to a new mechanism: the case of Shanghai-Hong Kong Stock Connect

While taking a gradualist approach in financial liberalization, China announced a “Through Train” in Tianjin as the first stock market liberalization measure at individual investor level in August 2007, which surprised the market but was set aside eventually. Finally after 7 years, a new measure of similar nature, the Shanghai-Hong Kong (SHHK) Stock Connect has been announced on 10 April 2014 and implemented on 17 November 2014. Although stakeholders emphasize on the mutual benefits of this new system, stock market liberalization measures are expected to be implemented by China after the “Through Train” in 2007. Based on the Efficient Market Hypothesis, the market has already reacted to all the available information through stock prices. This paper examine if the SHHK Stock Connect had significant and different effects on the Chinese and Hong Kong stock markets. My arguments are that the stock markets have incorporated the expectation of similar stock market liberalization measures after the “Through Train”; and SHHK Stock Connect benefits much to China but not much to Hong Kong. Event study methodology is applied to examine the stock markets response to three events, including the announcement of “Through Train” and SHHK Stock Connect as well as the implementation of the latter. Different level of significant cumulative abnormal returns (CARs) are identified from the announcement of “Through Train” and post-implementation of SHHK Stock Connect in Chinese and Hong Kong stock market. In contrast, not much significant CARs are identified from the period of announcement and pre-implementation of SHHK Stock Connect. The results suggest that the stock markets are efficient so that similar stock market liberalization measures have been incorporated by the stock markets after August 2007. Besides, a higher level of CARs are found in Chinese stock markets than in Hong Kong, which suggests that the divergence on the impacts of the stock market liberalization measures to the two markets