Explaining Share Price Disparity with Parameter Uncertainty: Evidence from Chinese A- and H-Shares

The price disparity between the dual-listed Chinese firms in the A- and H-share markets is one of the most intriguing puzzles in the Mainland and Hong Kong financial markets. In this paper, we revisit this price disparity puzzle using the channel of parameter uncertainty. In the presence of information asymmetry and market segmentation, investors have different views on a firm's asset volatility, and hence, different valuations of the same reference firm. We estimate a structural model for equity pricing using a Bayesian approach, in which investors' model-parameter uncertainty is represented by the posterior distributions of the firm's asset volatility. Our regression analysis shows that parameter uncertainty explains variation of the price disparity, in addition to other market-based and macro factors. We also find that parameter uncertainty is related to a firm's market-to-book ratio of equity, its age and size, and global risk appetite in the financial market.