Connecting the markets? Recent evidence on China's capital account liberalization

We use longitudinal data to investigate abnormal systematic changes in the price disparity of cross-listed stocks in China. We identify a recent liberalization policy that generated an unprecedented abrupt reduction in price disparity. The policy, known as Shanghai-Hong Kong Stock Connect, partially liberalizes capital flow between both stock exchanges. We find that the announcement of the policy caused the price disparity to immediately reduce by 4.0 to 4.5 percentage points. To estimate the longer-run impact, we use a panel data model and a two-step estimator that accounts for unobserved common factors and potential nonstationarity in outcomes. The effect is somewhat smaller, reducing the price disparity by 1.6 to 2.1 percentage points, or 3.0 to 3.5 percentage points after adjusting for spillovers.