The Chinese stock market : a study on its controversial characteristics

Abstract

The world of financial markets has always fascinated millions of people who try to understand it and maybe to earn something from it. Nowadays when we talk about financial markets we refers to the refer to the companies listed on the major stock exchange such as NYSE or NASDAQ, North American and European stock exchanges are the first coming to our mind, but Asia on its side is home to some major financial realities such as Japan , China and India. Among them the Chinese stock exchange has always raised doubts about its reliability and whether the impact of the heavily present government could have an actual influence on the data showed or not. On this regard this work will analyze and study the Chinese stock market, identifying its characteristics , peculiarities and comparing its indexes and stock prices with the one of fellow Hong Kong. The questions will try to answer is: Is Chinese stock exchange actually reliable? Reading through various articles , it is believed that Chinese stock prices does not reflect the actual situation of the companies listed , leading to some differences between Mainland China and Hong Kong. On this context to be able to answer the paper question, the work will start from the definition of the stock exchange analyzing then role of information by Shannon leading to the birth of the so called Kelly Criterion and the definition and difference between the price and the value of a stock. In addition the role of one price will be further described. Those basic concepts will help us to compare the data between China and Hong Kong stock exchanges. Such comparison has been carried out analyzing several papers studying the phenomenon of the price differential between Chinese and Hong Kong stock exchange before 2014, the year of the establishment of the mutual market called Shanghai-Hong Kong stock connect, and the data of cross listed companies on such stock exchange until summer 2018. Data confirm the existence of the gap between the two stock exchanges as well as the presence of some intrinsic characteristics of Chinese stock exchange that make it difficult to fully understand and consequently to trust.