■ Do Tigers Care about Dragons? Spillovers in Returns and Volatility between Chinese Stock Markets
For a long time a distinctive feature of the Chinese capital market was the existence of two types of stocks: class A stocks, available exclusively to domestic investors, and class B stocks, which could be traded only by foreigners. Given the existence of two trading locations for stocks in China, i.e., Shanghai and Shenzhen, this results in four different stock markets: class A and B stock markets, in both Shanghai and Shenzhen. Consequently, information about the Chinese corporate sector relevant for asset pricing could reach investors through one of these four markets. This would result in an immediate price reaction in one of them and a subsequent adjustment in the remaining ones, i.e., in information spillovers, or causality, across markets. Even if financial system reforms in the 2001-2002 period relaxed some restrictions by allowing some domestic (foreign) investors to trade in B (A) stocks, a partial separation still exists: trading in A (B) stocks is dominated by domestic (foreign) investors. Hence, investigating spillovers between A and B markets (as well as between Shanghai and Shenzhen) enables us to draw conclusions concerning the differences in efficiency across markets and in informativeness of trades by domestic and foreign investors.