An empirical study on the threshold cointegration of Chinese A and H cross-listed shares

We investigate the dynamic relationship between the prices of Chinese A and H market cross-listed shares using the Enders–Siklos threshold cointegration approach. Our data are the daily closing prices of the Hang Seng China AH (A) index and the Hang Seng China AH (H) index from 4 January 2006 to 1 November 2013. We find a threshold cointegration between these two indices, instead of the linear cointegration well established in the literature. The short-term adjustment to the equilibrium shows an asymmetric effect according to the price deviation from the equilibrium. Moreover, using a Granger causality test, we find a bi-directional causality between these two markets, indicating a close relationship between them. A pairs trading rule, based on the estimated threshold cointegration model, demonstrates the usefulness of our results as it generates a significantly higher return than a naive buy-and-hold trading rule.