Speculative Bubbles in Segmented Markets : Evidence from Chinese Cross-Listed Stocks

Pavlidis, Efthymios and Vasilopoulos, Konstantinos (2020) Speculative Bubbles in Segmented Markets : Evidence from Chinese Cross-Listed Stocks. Journal of International Money and Finance, 109: 102222. ISSN 0261-5606

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We propose a novel approach for testing for speculative bubbles in segmented capital markets. The basic idea is that, under capital controls, heterogeneity of speculative expectations across international equity markets causes financial assets with identical cash flow promises to trade at different prices. Because these deviations from the law of one price inherit the properties of the speculative bubble process, they display periods of explosive dynamics and have predictive power for future movements in equity prices in sample. These two hypotheses can be examined empirically using sequential unit root tests and predictive regressions. An attractive feature of this approach for bubble detection is that it does not require the specification of a model for market fundamentals, thus mitigating the well-known joint hypothesis problem. The focus of the paper is on mainland Chinese companies that cross list shares in Hong Kong. China is an ideal setting for our analysis because of the significant restrictions on capital movements imposed by the authorities and the turbulent behaviour of its stock market over the last decades.

Item Type:
Journal Article
Journal or Publication Title:
Journal of International Money and Finance
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of International Money and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Money and Finance, 109, 2020 DOI: 10.1016/j.jimonfin.2020.102222
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?? financeeconomics and econometrics ??
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Deposited On:
26 May 2020 10:50
Last Modified:
10 Mar 2024 00:52