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We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.
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Research on leverage and asset-price fluctuations focuses on the direct effect of lax bank lending enabling financially-constrained investors to take excessive risks. Ignored are unconstrained investors speculating on higher prices during credit booms. To identify these two effects, we utilize China's staggered liberalization of stock-margin lending from 2010-2015--which encouraged a bank/brokerage-credit-fueled stock-market bubble. The direct effect is a 25 cent increase in a stock's market capitalization for each dollar of margin debt. Unconstrained investors led to an even larger increase in valuations of an additional 32 cents as they speculated on stocks likely to qualify for lending.
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We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.
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Despite the dominance of retail investors in the Chinese stock market, there's a conspicuous absence of price momentum in weekly and monthly returns. This study uncovers the presence of price momentum in daily returns and, through a systematic analysis of trading heterogeneity among investors, links daily momentum to the attention and trading activities of new investors--a phenomenon particularly significant in emerging stock markets. Furthermore, our findings indicate the existence of daily price momentum in various other emerging markets, contrasting with its relative scarcity in developed ones.
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Household credit expansions often coincide with high stock-market valuations, but identifying a causal relationship remains challenging. Because unconstrained arbitrageurs play a pivotal role in stock-pricing, the impact of credit is not obvious (despite evidence in less-liquid housing markets). Further, given margin restrictions, credit may leak into stock prices in difficult-to-measure ways. We address these issues using an unprecedented 2010-2015 regulatory expansion of margin lending in China. Institutional fund trades and regression discontinuity evidence suggest a positive impact on prices that was largely anticipated by unconstrained investors. We develop a dynamic panel model of stock prices and recover large causal estimates.
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The Chinese economy is one of the most important in the world, and its success is driven in large part by its financial system. Though closely scrutinized, this system is poorly understood and vastly different than those in the West. The Handbook of China’s Financial System will serve as a standard reference guide and invaluable resource to the workings of this critical institution. The handbook looks in depth at the central aspects of the system, including banking, bonds, the stock market, asset management, the pension system, and financial technology. Each chapter is written by leading experts in the field, and the contributors represent a unique mix of scholars and policymakers, many with firsthand knowledge of setting and carrying out Chinese financial policy. The first authoritative volume on China’s financial system, this handbook sheds new light on how it developed, how it works, and the prospects and direction of significant reforms to come.
E-books --- Money market. Capital market --- Economic policy and planning (general) --- International finance --- China
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