Does theT+ 1 rule really reduce speculation? Evidence from Chinese Stock IndexETF

Abstract

Stock market in China is subject to the T + 1 rule, which requires investors to hold the asset for at least 1 day before selling. This rule was initially imposed in the mid‐1990s, replacing the previous T + 0 rule, to prevent excessive speculative trading. Given the considerable changes in China's financial market over the past 20 years, it is controversial whether the T + 1 rule should be replaced by the T + 0 rule in today's market. In this paper, we empirically test the effect of the T + 1 rule on market speculation. To identify potentially different impacts of the T + 1 and T + 0 rule, we choose a unique pair of CSI 300 ETFs, one subject to the T + 1 rule while the other to the T + 0 rule. Based on an error correction model, we develop an empirical methodology to test intraday speculation in the ETF price. Our empirical results show that, at least under current market condition, the T + 1 rule reduces the price efficiency and spurs more speculation when the market liquidity is not in a shortage.

Do exchange‐traded fund flows increase the volatility of the underlying index? Evidence from the emerging market in China

“…Chen et al . () investigate the effect of the trading rule of T + 1 for the Chinese stock market on speculation by studying the Huatai and Jiashi CSI 300 ETFs. While these two CSI 300 ETFs are large ETFs in China, they are such singular trading instruments that they may not be generalisable to a broader market.…”

“…Such a rapidly growing market arouses great interest among not only academics but also practitioners and regulators, all of which motivates us in this study. Second, the trading rule of T + 1 implemented in the Chinese stock market facilitates the specification of different motives for APs’ share creation/redemption activities, although this rule reduces efficiency (Chen et al ., ), as our study addresses the distinct roles of APs. ETF shares are usually created/redeemed at closing or after hours.…”

Corporate distress prediction in China: a machine learning approach

“…See also Special Issue on China published in Accounting and Finance, including studies by Chen et al . (,b), Liao et al . (), Peng et al .…”

Do stock bulletin board systems (BBS) contain useful information? A viewpoint of interaction between BBS quality and predicting ability

“…() investigated the price efficiency during the 2015 Chinese stock market crash and found a less serious price delay after the crash indicating that negative information travels slowly only when investors are overconfident. Other types of information hidden in the marginal trading (Li et al ., ) and market microstructure (Chen et al ., ; Xiong et al ., ; Lv and Wu, ) are also well studied in the literature and all of them are regarded as significant factors in the market dynamics or short‐term movement of asset prices.…”