Advertisement

A Chinese Style Speculative Market

  • Eric Girardin
  • Zhenya Liu
Chapter

Abstract

Analyses of the functioning of China’s stock market typically emphasize three major anomalies, all associated with departures from the informationally efficient market hypothesis.

The inherently speculative nature of the market, with recurrent bubbles, is the major anomaly, usually linked to major characteristics of that market involving the dominance of unsophisticated investors, binding short-sale constraints, and often costly arbitrage.

Exotic seasonalities represent the second recurrent anomaly. A Red-May effect, featuring the highest monthly returns every year in the spring, stands in sharp contrast to the January effect which rules in most major stock markets, and seems linked to the seasonal behaviour of credit awarded by banks.

Third, the segmentation, leading to a higher price of the domestic listed versus the foreign listed shares of Chinese mainland companies, represents the so-called puzzle of the Chinese stock market. It is an opposite premium to that characterizing multiple listings of other countries’ companies. This puzzle is still present after repeated timid attempts at moving away from a rigid currency peg or at the gradual lifting of capital controls.

Keywords

Speculation Puzzles Seasonality Share-price premia Opening-up 

References

  1. Aizenman, J. 2003. On the Hidden Links Between Financial and Trade Opening. NBER Working Paper 9906.Google Scholar
  2. Allen, F, J. Qian, S.C. Shan, and J.L. Zhu. 2014. The Best Performing Economy with the Worst Performing Stock Market: Explaining the Poor Performance of the Chinese Stock Market, Manuscript, Imperial College, University of London.Google Scholar
  3. Bailey, W., P. Chung, and J.-K. Kang. 1999. Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-border Investments? Journal of Financial and Quantitative Analysis 34: 489–512.CrossRefGoogle Scholar
  4. Binde, P. 2005. Gambling Across Cultures: Mapping Worldwide Occurrence and Learning from Ethnographic Comparison. International Gambling Studies 5 (1): 1–27.CrossRefGoogle Scholar
  5. de Bondt, G.J., T.A. Peltonen, and D. Santabárbara. 2010. Booms and Busts in China’s Stock Market: Estimates Based on Fundamentals. ECB Working Paper, No. 1190.Google Scholar
  6. Chakravarty, S., A. Sarkar, and L. Wu. 1998. Information Asymmetry, Market Segmentation and the Pricing of Cross-listed Shares: Theory and Evidence from Chinese A and B Shares. Working Paper, Federal Reserve Bank of New York, Research Department.Google Scholar
  7. Chan, K., and J.K. Kwok. 2005. Market Segmentation and Share Price Premium: Evidence from Chinese Stock Markets. Journal of Emerging Market Finance 4: 43–61.CrossRefGoogle Scholar
  8. Chen, G., C.C.Y. Kwok, and O.M. Rui. 2001. The Day-of-the-Week Regularity in the Stock Markets of China. Journal of Mathematical Financial Management 11: 139–163.Google Scholar
  9. Chi, W., R. Brooks, E. Bissoondoyal-Bheenick, and X. Tang. 2016. Classifying Chinese Bull and Bear Market: Indices and Individual Stocks. Studies in Economics and Finance 33 (4): 509–531.CrossRefGoogle Scholar
  10. Deardorff, A.V. 1979. One-way Arbitrage, and Its Implications for the Foreign Exchange Market. Journal of Political Economy 87 (2): 351–364.CrossRefGoogle Scholar
  11. Deng, Y., E. Girardin, R. Joyeux, and S. Shi. 2017. Did Bubbles Migrate from the Stock to the Housing Market in China from 2005 to 2010? Pacific Economic Review 22 (3): 276–292.CrossRefGoogle Scholar
  12. Deng, Y., R. Morck, J. Wu, and B. Yeung. 2015. China’s Pseudo-monetary Policy. Review of Finance 19: 55–93.CrossRefGoogle Scholar
  13. Diba, B.T., and H.I. Grossman. 1988. Explosive Rational Bubbles in Stock Prices? American Economic Review 78 (3): 520–530.Google Scholar
  14. Fama, E. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance 25 (2): 383–417.CrossRefGoogle Scholar
  15. Fernald, J., and J.H. Rogers. 2006. Puzzle Sin the Chinese Stock Market. Review of Economics and Statistics 84 (3): 416–432.CrossRefGoogle Scholar
  16. Fung, J., E. Girardin, and J. Hua. 2016. How does an Exchange-rate Regime Change Affect Dual-listed Stock Arbitrage? Evidence from China’s A- and H-share Markets, Manuscript, Aix Marseille School of Economics, Aix Marseille University.Google Scholar
  17. Girardin, E., and F. Salimi Namin. 2018. Shadowing the Dollar or Basket Pegging in China? Aix Marseille School of Economics, February, Manuscript.Google Scholar
  18. Girardin, E., and R. Joyeux. 2013. Macro Fundamentals as a Source of Stock Market Volatility in China: A GARCH-MIDAS Approach. Economic Modelling 34: 59–68.CrossRefGoogle Scholar
  19. Girardin, E., R. Joyeux, and S. Shi. 2018. Stock Market Bubble Migration: From Shanghai to Hong Kong. In Uncertainty, Expectations and Asset Price Dynamics, ed. F. Jawadi, 173–192. Springer.Google Scholar
  20. Girardin, E., and Z. Liu. 2003. The Chinese Stock Market: A Casino with Buffer Zones. Journal of Chinese Economic and Business Studies 1 (1): 57–70.CrossRefGoogle Scholar
  21. ———. 2005. Bank Credit and Seasonal Anomalies in China’s Stock Markets. China Economic Review 16 (4): 465–483.CrossRefGoogle Scholar
  22. ———. 2007. The Financial Integration of China: New Evidence on Temporally Aggregated Data for the A-share Market. China Economic Review 18: 354–371.CrossRefGoogle Scholar
  23. ———. 2009. Is the B-share Market Ripe for Merging with the A-market or was it Already Long Ago? Journal of Renmin University of China 4 (1): 11–24.Google Scholar
  24. Groenewold, N.S., Y. Wu, H.K. Tanang, and X.M. Fan. 2004. The Chinese Stock Market: Efficiency, Predictability and Profitability. Cheltenham: Edward Elgar.Google Scholar
  25. Guo, K., Y. Sun, and X. Qian. 2017. Can investor Sentiment be Used to Predict the Stock Price? Dynamic Analysis based on China Stock Market. Physica A 469: 390–396.CrossRefGoogle Scholar
  26. Han, X., and Y. Li. 2017. Can Investor Sentiment be a Momentum Time-series Predictor? Journal of Empirical Finance 42: 212–239.CrossRefGoogle Scholar
  27. Harman, Y.S., and T.W. Zuehlke. 2004. Duration Dependence Testing for Speculative Bubbles. Journal of Economics and Finance 28 (2): 147–154.CrossRefGoogle Scholar
  28. Hodrick, R., and E. Prescott. 1997. Postwar US Business Cycles: An Empirical Investigation. Journal of Money, Credit and Banking 29 (1): 1–16.CrossRefGoogle Scholar
  29. Hong, H., J. Scheinkman, and W. Xiong. 2006. Asset Float and Speculative Bubbles. Journal of Finance 61: 1073–1117.CrossRefGoogle Scholar
  30. Jiang, Z., W. Zhou, D. Sornette, R. Woodard, K. Bastiaensen, and P. Cauwels. 2010. Bubble Diagnosis and Prediction of the 2005–2007 and 2008–2009 Chinese Stock Market Bubbles. Journal of Economic Behavior and Organization 74: 149–162.CrossRefGoogle Scholar
  31. Kang, J., M.H. Liu, and S.X. Ni. 2002. Contrarian and Momentum Strategies in the China Stock Market: 1993–2000. Pacific basin Finance Journal 10 (3): 243–265.CrossRefGoogle Scholar
  32. Karolyi, G.A., and Li, L. 2003. A Resolution of the Chinese Discount Puzzle. Dice Center Working Paper 2003/34.Google Scholar
  33. Kashyap, R. 2016. Hong Kong-Shanghai Connect/Hong Kong-Beijing Disconnect? Scaling the Great Wall of Chinese Securities Trading Costs. Journal of Trading 11 (3): 81–134.CrossRefGoogle Scholar
  34. Lane, P.R., and G.-M. Milesi-Feretti. 2005. Financial Globalization and Exchange Rates. Working Paper 05/3, International Monetary Fund.Google Scholar
  35. Lence, S., and B. Falk. 2005. Cointegration, Market Integration, and Market Efficiency. Journal of International Money and Finance 24: 873–890.CrossRefGoogle Scholar
  36. Li, Z. 2015. Emergence of China’s 2006–2007 Stock Market Bubble and Its Burst. In The Chinese Stock Market, ed. S. Cheng and Z. Li, vol. 2, 61–124. Basingstoke: Palgrave Macmillan.Google Scholar
  37. Li, C.-A., and C.-C. Yeh. 2011. Investor Psychological and Behavioural Biases: Do High Sentiment and Momentum Exist in the China Stock Market? Review of Pacific Basin Financial Markets and Policies 14 (3): 429–448.CrossRefGoogle Scholar
  38. Liu, Z., D. Han, and S. Wang. 2016. Testing Bubbles: Exuberance and Collapse in Shanghai A-share Market. In China’s New Sources of Economic Growth, Vol. 1. Reform, Resources and Climate Change, ed. L. Song, R. Garnaut, C. Fang, and L. Johnston, 247–270. Acton: Australian National University Press.Google Scholar
  39. Malkiel, B.G. 2007. The Efficiency of the Chinese Stock Market: Some Unfinished Business on the Road to Economic Transformation. CEPS Working Paper, 154.Google Scholar
  40. McQueen, G., and S. Thorley. 1994. Bubbles, Stock Returns, and Duration Dependence. Journal of Financial and Quantitative Analysis 29 (3): 379–401.CrossRefGoogle Scholar
  41. Mei, J., J. Scheinkman, and W. Xiong. 2009. Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia. Annals of Economics and Finance 10: 225–255.Google Scholar
  42. Ni, Z.-X., D.-Z. Wang, and W.-J. Xue. 2015. Investor Sentiment and Its Non-linear Effect on Stock Returns: New Evidence from the Chinese Stock Market Based on Panel Quantile Regression Model. Economic Modelling 50: 266–274.CrossRefGoogle Scholar
  43. Pagan, A.R., and K.A. Sossounov. 2003. A Simple Framework for Analysing Bull and Bear Markets. Journal of Applied Econometrics 18 (1): 23–46.CrossRefGoogle Scholar
  44. Peng, W., H. Miao, and N. Chow. 2007. Macroeconomic Linkages between Hong Kong and Mainland China. Working Paper 6/07, Hong Kong Monetary Authority.Google Scholar
  45. Phillips, P.C., S. Shi, and J. Yu. 2014. Specification Sensitivity in Right-tailed Unit-root Testing for Explosive Behaviour. Oxford Bulletin of Economics and Statistics 76 (3): 315–333.CrossRefGoogle Scholar
  46. Phillips, P.C.B., S. Shi, and J. Yu. 2015. Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500. International Economic Review 56: 1043–1078.CrossRefGoogle Scholar
  47. Scheinkman, J., and W. Xiong. 2003. Overconfidence and Speculative Bubbles. Journal of Political Economy 111: 1183–1219.CrossRefGoogle Scholar
  48. Scherbina, A., and B. Schlusche. 2014. Asset Price Bubbles: A Survey. Quantitative Finance 14 (4): 589–604.CrossRefGoogle Scholar
  49. Sharif, S. 2013. Essays on Short Selling and Margin Trading in China. PhD Thesis, Massey University, New Zealand.Google Scholar
  50. Shiller, R. 1981. Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends? American Economic Review 71: 421–435.Google Scholar
  51. Siegel, J. 2014. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-term Investment Strategy. New York: McGraw-Hill.Google Scholar
  52. Wu, H. 2011. The Real Growth of Chinese Industry Debate Revisited: Reconstructing China’s Industrial GDP in 1949–2008, Institute of Economic Research, Hitotsubashi University. Economic Review 62 (3): 209–224.Google Scholar
  53. Xiao, G. 2004. Roundtripping Foreign Direct Investment and the People’s Republic of China. ADBI Working Paper, No. 58, July.Google Scholar
  54. Zhou, Z. 2015. Development and Problems of Stock Index Futures and Margin Trading and Short Selling in China. In The Chinese Stock Market, ed. S. Cheng and Z. Li, vol. 1, 313–367. Basingstoke: Palgrave Macmillan.Google Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Eric Girardin
    • 1
  • Zhenya Liu
    • 1
    • 2
  1. 1.Aix-Marseille UniversityMarseilleFrance
  2. 2.Renmin University of ChinaBeijingChina

Personalised recommendations