Department of Economics and Business Economics

Testing for Expected Return and Market Price of Risk in Chinese A-B Share Market: A Geometric Brownian Motion and Multivariate GARCH Model Approach

Research output: Working paperResearch

  • Jie Zhu, Denmark
  • School of Economics and Management
There exist dual-listed stocks which are issued by the same company in some stock
markets. Although these stocks bare the same firm-specific risk and enjoy identical
dividends and voting policies, they are priced differently. Some previous studies show
this seeming deviation from the law of one price can be solved due to different ex-
pected return and market price of risk for investors holding heterogeneous beliefs.
This paper provides empirical evidence for that argument by testing the expected
return and market price of risk between Chinese A and B shares listed in Shanghai
and Shenzhen stock markets. Models with dynamic of Geometric Brownian Motion
are adopted, multivariate GARCH models are also introduced to capture the feature
of time-varying volatility in stock returns. The results suggest that the different pric-
ing can be explained by the difference in expected returns between A and B shares
in Chinese stock markets. However, the difference between market prices of risk is
insignificant for both markets if GARCH models are adopted.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages35
Publication statusPublished - 2008

    Research areas

  • China stock market; market segmentation; expected return; market price of risk; GBM; GARCH

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ID: 10689503