Daily Price Limits and Destructive Market Behavior

Chen, Ting; Gao, Zhenyu; He, Jie; Jiang, Wenxi; Xiong, Wei

doi:10.3386/w24014

Cited by 16 publications

(31 citation statements)

References 5 publications

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“…Finally, we investigate whether the risen or fallen of the idiosyncratic volatility is associated to the trading activities of institutional or retail investors. Despite Nartea et al (2013) conjecture (do not test) that the idiosyncratic volatility is associated with retail investors due to the dominant retail trading in Chinese stock market, the more recent studies by Chen et al (2019) and Darby et al (2019) demonstrate the destabilizing behaviours of large or institutional investors in Chinese stock market. Following Darby et al (2019), we use the cash flow data from the largest trading group as the proxy for institutional trading, and find the idiosyncratic volatility is significantly associated with large stock price and trading activities of institutional investors.…”

Section: Introductionmentioning

confidence: 88%

“…The aggregate idiosyncratic volatility is described as by autoregressive process with regimes shift associated with structural market reforms.In addition, due to the retail dominance in stock trading in Chinese stock market, they also present supportive evidence that the episodic idiosyncratic volatility is associated with retailing trading.The question of whether institutional investors or individual investors are responsible for the changes of idiosyncratic is our key research question in this section. DespiteNartea et al (2013) conjecture that retailing investors might be responsible for the changes of idiosyncratic volatility in Chinese stock market due to the dominance of retail trading, a number of recent studies show the destructive trading behaviour of institutional investors in Chinese stock markets Chen et al (2019). show large investors in Chinese stock markets play the destructive market behaviour from 2012 to 2015 via buying on the day when a stock hits the 10% upper price limit and then sell on the next day Darby et al (2019).…”

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confidence: 99%

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The Idiosyncratic Risk in Chinese Stock Market

Darby

Zhang

2019

SSRN Journal

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Using daily stock return data of all listed firms in Chinese stock market from 1998 to 2018, we disaggregate the volatility of common stocks at the market, industry and firm levels. We find market volatility, on average, is the highest while firm volatility tends to lead to market and industry volatility series. None long-term trend time series behaviour exists for all three volatility series and firm volatility is best described by an autoregressive process with regime shifts associated with the structural market reforms or volatile market movements. We further proceed to identify the source of volatility at the industry level and find the idiosyncratic volatility in the largest manufacturing industry not only accounts for the largest proportion in the aggregate firm volatility but also is the lead indicator for the idiosyncratic volatility of other industries. Finally, unlike Brandt et al. [Review of Financial Studies 23(2): 863-899 (2010)], we find the idiosyncratic volatility in Chinese stock market is associated with high stock trading activities by institutional investors, the result of which is also robust when using other measures of idiosyncratic volatility.

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Section: Introductionmentioning

confidence: 88%

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confidence: 99%

The Idiosyncratic Risk in Chinese Stock Market

Darby

Zhang

2019

SSRN Journal

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“…Second, Chinese regulators enforced a daily 10-percent rule (see e.g., Chen et al (2018b) for a detailed analysis). Under this rule, each individual stock was allowed to move a daily maximum of 10 percent from the previous closing level in either direction, before triggering a price limit.…”

Section: Shadow-financed Margin Accountsmentioning

confidence: 99%

Leverage-Induced Fire Sales and Stock Market Crashes

Bian

Shue

et al. 2018

SSRN Journal

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We provide direct evidence of leverage-induced fire sales contributing to a market crash using account-level trading data for brokerage-and shadow-financed margin accounts during the Chinese stock market crash of 2015. Margin investors heavily sell their holdings when their account-level leverage edges toward their maximum leverage limits, controlling for stock-date and account fixed effects. Stocks that are disproportionately held by accounts close to leverage limits experience high selling pressure and abnormal price declines which subsequently reverse. Unregulated shadow-financed margin accounts, facilitated by FinTech lending platforms, contributed more to the crash despite their smaller asset holdings relative to regulated brokerage accounts.

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“…There are very few studies discussing circuit breakers in Chinese financial markets after 2018. Chen et al (2019) confirmed the importance of price limits on individual stock trading and pointed out that 41 out of 58 major countries have applied price limit rules in their equity exchanges. Another paper by Chen et al (2017) constructed a theoretical model to investigate how circuit breakers impact the market when investors trade to share risk.…”

Section: A Review Of Circuit Breakermentioning

confidence: 73%

Do Circuit Breakers Impede Trading Behavior? A Study in Chinese Financial Market

2019

Singapore Econ. Rev.

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As the most influential regulation in 2016, China launched circuit breakers in the financial markets. However, the circuit breaker mechanism was implemented for only four days and then suspended. Many criticisms then stated that circuit breakers impeded trading behavior in Chinese financial markets. This study explores this short-life circuit breaker mechanism in China, and examines whether circuit breakers impede trading behavior in Chinese financial markets as many criticisms stated. We use an intraday dataset and investigate the circuit breakers. Contrary to those criticisms, we find that circuit breakers are not easily reachable and have no “magnet effect” between two thresholds of breakers. We also find that without protection of circuit breakers, potential large market fluctuations will have negative impacts on individual stocks’ liquidity and value. As the major contribution, our study indicates that Chinese financial markets still need a circuit breaker mechanism to protect investors’ benefits and maintain the market liquidity and stability.

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Daily Price Limits and Destructive Market Behavior

Cited by 16 publications

References 5 publications

The Idiosyncratic Risk in Chinese Stock Market

The Idiosyncratic Risk in Chinese Stock Market

Leverage-Induced Fire Sales and Stock Market Crashes

Do Circuit Breakers Impede Trading Behavior? A Study in Chinese Financial Market

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