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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.
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Sentiment is a positive source of momentum in China (Li and Yeh 2011; and Kang et al. 2002 for earlier evidence) but this may apply only in the short run with contrarian effects in the long run (Han and Li 2017). The role of sentiment is confirmed with social network data (Guo et al. 2017). Overreaction and asymmetric cognitive biases seem to be present in the A-share market (Ni et al. 2015).
An alternative method for dating bubbles, mainly used by practitioners, relies on the detection of a faster-than-exponential increase in stock prices as the main diagnostic of bubbles. For mainland China this approach detects two bubbles from mid-2005 to October 2007 and from November 2008 to August 2009 (Jiang et al. 2010).
The 2009 bubble is not apparent in Shanghai’s Price-dividend ratio when the dating of bubbles uses monthly data (Liu et al. 2016).
Over its first five years of existence, margin trading expanded more than five-fold (from US$65 billion).
Given the strength of the Red-May effect, Girardin and Liu ( 2003) make sure that such anomalous returns are not wiped out by seasonal variation in risk, or by news in output growth.
The evidence on the huge scale of round-tripping behind foreign direct investment, which, according to Xiao ( 2004), had a mean value of 40% of recorded FDI, shows that such hidden flows do take place on a large scale.
To compare correlations across markets between two time periods, they are corrected for changes in variance. The betas between the two markets are corrected in a similar way.
Many empirical studies of financial integration have examined the case of China, always with daily data (Girardin and Liu 2007, for a survey of early work).
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- A Chinese Style Speculative Market
- Chapter 4
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