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Title: On speculative bubbles in the Chinese stock market: Evidence from cross-listed stocks Authors:  Efthymios Pavlidis - Lancaster University Management School (United Kingdom) [presenting]
Kostas Vasilopoulos - Lancaster University Management School (United Kingdom)
Abstract: During the last few decades, the Chinese stock market has experienced great turbulence, with periods of rapid price increases followed by severe market crashes. A widely held view is that this volatile behavior reflects speculative bubbles which drive asset prices away from their intrinsic values and then burst. Although popular, this hypothesis is difficult to examine. The difficulty lies in the fact that the intrinsic value of financial assets is not directly observable. As a consequence, most econometric tests for bubbles actually examine a composite hypothesis: no bubbles and a correctly specified model for market fundamentals. Because rejection of the null may be solely due to model misspecification, such tests are inconclusive. We propose a novel approach that circumvents this obstacle by utilizing information incorporated in the share prices of Chinese cross-listed companies. The basic idea is that an A-share that is listed on the mainland Chinese stock market and an H-share that is listed on the Hong Kong Stock Exchange by the same company have the same underlying fundamentals and, therefore, the presence of explosive dynamics in their price difference provides conclusive evidence of speculative bubbles. By applying a recursive right-tailed unit root tests as well as a wild-bootstrap version of it, we find that a substantial number of cross-listed companies display speculative bubbles.