Does the law of one price hold better under a flexible exchange rate system?

Sung Bae, Mingsheng Li, Jing Shi

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Using China's recent exchange rate system reform as a special event, we investigate two issues pertinent to the change in the exchange rate system: how the documented price discounts on Chinese foreign shares (B- and H-shares) changed after China shifted to a more flexible exchange rate system; and what potential factors contributed to such changes. We find significant increases in foreign share discounts after the reform and these increases cannot be explained by the changes in stock risk, information asymmetry or market liquidity. Our results provide evidence that investor expectation on long-run RMB appreciation and investor attitude toward exchange rate risk under a more flexible exchange rate system contribute to the observed increases in foreign share discounts following the reform.

Original languageEnglish
Pages (from-to)306-322
Number of pages17
JournalJournal of Multinational Financial Management
Volume19
Issue number4
DOIs
Publication statusPublished - Oct 2009
Externally publishedYes

Keywords

  • exchange rate system
  • investor expectation and attitude effect
  • law of one price
  • price discounts of Chinese foreign shares

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