The Chinese equity market : characteristics, microstructure and efficiency
The purpose of this research is to examine various issues about market efficiency and market microstructure in the Chinese equity market. Where. to date, there has been relatively little attention. Specifically. this thesis intends to answer the following questions. Is the Chinese equity market efficient? If not, has it been evolving towards efficiency over the years? What are the intraday patterns of price behaviour? Which trades move prices? Finally, does Chinese investors' psychology have effects on prices? In order to answer these questions four sets of empirical analysis have been undertaken. The first study investigates the evolution of China's stock market via analysing the ongoing predictive ability and profitability of simple, well known technical trading rules. The results suggest that while technical trading rules had short term predictive ability and profitability in the Chinese stock markets during the 1990's, this lessened as the markets evolved. The second research study documents the intraday variation in bid-ask spreads, trading volumes and volatility. The findings suggest that the existence of the intraday anomalies is not due to the peculiarities of the US markets. However, the shape of the intraday patterns in order-driven markets is different from those in quote-driven markets, which suggests a need for new theoretical models. The third area of work examines which trades move prices by testing three hypotheses: stealth trading, public information and price manipulation hypotheses. The results show that while medium and large-size trades are associated with disproportionately cumulative price changes, it is the large-size trades which have the largest effect on cumulative price increases. Aligned with the concerns noted by some eminent individuals in China, there seems to be price manipulation in China's stock market. The final research area studies the influence of Chinese cultural factors on price clustering and resistance. The results show a higher propensity of clustering on the digit 8 and lower propensity on digits 4 and 7, which is consistent with the preference for number 8 and the avoidance of numbers 4 and 7 in Chinese culture. The results suggest that investors' psychology does have effects on prices. This research hopes to help academics and practitioners understand better the market efficiency and the trading behaviour in the Chinese equity market. Especially, it has implications for policy makers and regulators who involve in the design of an efficiency market.