Policy Shock and the Evolution of Risk Pricing: An Empirical Analysis of Mainland Chinese Real Estate Stocks under the Three Red Lines

This paper examines the impact of Chinas 2020 Three Red Lines policy on the risk pricing and return dynamics of real estate companies listed in Hong Kong, using an event study framework and Capital Asset Pricing Model (CAPM) regression. The policy, which imposed borrowing limits to curb excessive corporate leverage, marked a pivotal shift in regulatory stance and triggered significant volatility within the real estate sector. To isolate the policys effects, the study compares a treatment group of 15 mainland developers with high leverage against a control group of 15 firms from related but unaffected sectors. Results from the short-term event analysis reveal a marked deterioration in adjusted returns for the treatment group immediately following the policy announcement, while the control group exhibited resilience. Long-term CAPM regressions indicate a decline in the explanatory power of market beta for real estate stocks post-policy, underscoring a structural change in risk premium formation. Moreover, subgroup analyses based on firm size demonstrate that both large-cap and small-cap developers experienced intensified systemic risk and declining abnormal returns. In contrast, control group displayed stable or improving performance metrics. These findings suggest that the Three Red Lines policy not only constrained real estate firms financial flexibility but also reshaped investor risk perceptions and traditional asset pricing mechanisms in China's equity markets.