AH Premiums and Firm-Level Sentiment

Abstract: This study investigates the persistent pricing disparity between dual-listed A-shares and H-shares in China from January 2009 to October 2024, focusing on the role of investor sentiment. Using a novel firm-level sentiment index constructed via principal component analysis (PCA) of behavioral proxies (PSY, RSI, adjusted turnover, and trading volume), I analyze 17,624 firm-month observations to quantify cross-market sentiment differentials. Results reveal that sentiment divergence significantly explains AH premiums, with stronger effects when H-share sentiment exceeds A-share levels. The study identifies short-term persistence of sentiment effects (up to two lags) and seasonal patterns tied to financial reporting cycles. Robustness tests confirm these findings hold beyond crisis periods. By integrating behavioral finance with market condition, this research provides original evidence that investor psychology, amplified by arbitrage constraints, sustains pricing anomalies. The findings challenge traditional asset pricing models and highlight the importance of sentiment metrics in cross-listed securities analysis.