Speculative trading, price pressure and overvaluation.

Prior theoretical studies (e.g., Harrison and Kreps, 1978) show that investors pay prices over their valuation of assets if potential buyers are willing to pay even more in the future. This study provides supporting evidence by focusing on the Hong Kong “through train” scheme in August 2007, through which mainland Chinese investors were allowed to directly invest in Hong Kong market, but the decision was reassessed (actually suspended) in November 2007. Our findings show that Hong Kong stocks exhibit excess trading volume associated with the two announcements, and stocks are traded higher after the launch-decision day and lower after the reassessment-decision day.