Who benefits more? Shanghai-Hong Kong stock Connect-"Through Train"

This study investigates the impact of the introduction of the Shanghai-Hong Kong Stock Connect (SHSC) program on the market quality in the Shanghai A-shares and Hong Kong Main Board shares markets. This study employs the difference-in-difference (DID) approach to examine whether the market quality of constituent stocks increases relative to that of non-constituent stocks after the launch of the new SHSC program. Surprisingly, we find that market quality, as reflected by the market illiquidity and market volatility measures of constituent stocks, is worse than that of non-constituent stocks after the launch of the SHSC program in the Shanghai A-shares market. However, the differences in market quality between constituent and non-constituent stocks gradually diminish over time. In contrast, no significant market quality effects generally occur in the Hong Kong Main Board shares market. We support this interesting finding by showing that different herding behavior exists in the two connected stock markets after implementation of the new program. Namely, the herding behavior of constituent stocks is more severe than that of non-constituent stocks in the Shanghai A-shares market but no apparent herding effects exist in the Hong Kong Main Board shares market.