Trading Imbalances and the Relative Prices of Stock Pairs

26 Pages Posted: 18 Mar 2011

See all articles by Mark S. Seasholes

Mark S. Seasholes

Arizona State University (ASU)

Clark Liu

Tsinghua University - PBC School of Finance

Date Written: March 15, 2011

Abstract

This paper studies the relative prices of dual-class shares - i.e., equities from the same company that are listed on two different markets. Theoretically, frictions such as short-sale constraints and limited risk-bearing capacity can lead identical securities trading in different markets to experience large and volatile price differences. Using a sample of 43 companies with stocks listed in China (mainland) and Hong Kong, we link trading imbalances to these large and volatile price differences. A one standard deviation shock to imbalances in China (or Hong Kong) leads to 166 bp (or 122 bp) change in the stock's transitory price (at a weekly frequency). We further show that transitory variance represents 45% of a stock's total return variance in Hong Kong. Such a magnitude is surprisingly large considering the average company's market capitalization is over USD 12 billion and Hong Kong is considered to have a developed stock market.

Keywords: Liquidity, Dual-Class Stocks

JEL Classification: G12, G14

Suggested Citation

Seasholes, Mark S. and Liu, Clark, Trading Imbalances and the Relative Prices of Stock Pairs (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786655 or http://dx.doi.org/10.2139/ssrn.1786655

Mark S. Seasholes (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Clark Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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