What Drives Change in the A-Share Premium in China?

The consistent premium of stock prices of A-shares over stock prices of B-shares in China is an enduring puzzle. Prior studies primarily focus on driving forces of the premium. Distinct from them, this study explores driving forces of change in the premium. Among the 12 explanatory factors investigated, the sentiment gap between the A and B share markets shows the largest explanatory power. Specifically, one standard deviation difference in the sentiment gap links to one-fourth standard deviation difference in change of the premium. The economic magnitude is not only sizable but also four times the magnitude of difference in the premium counterpart. Apparently, the change is more sensitive to the sentiment gap than the premium. Moreover, the significant results hold for sub-period analysis. Finally, we uncover the capability of the lagged sentiment gap in predicting the change.