A Chinese Style Speculative Market
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.
KeywordsSpeculation Puzzles Seasonality Share-price premia Opening-up
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