AbstractThis thesis examines cross-sectional stock returns in the Chinese stock market, which has a unique setting of the T+1 rule arrangement and short-sales regulation policy.
The first essay, Overnight and Intraday Returns in Chinese Stock Market, documents strong persistence and a reversal pattern of overnight and intraday returns across a trading day based on an analysis of high-frequency trading data of the Chinese stock market from 2009 to 2021. A decomposition of the abnormal returns of 11 trading strategies over intraday intervals reveals a U-shape pattern of anomalous profits, which mainly exist at the opening and closing of the market, especially for the variables of trading friction. To the best of our knowledge, these findings are unique and novel. We attribute the different pattern to the trading behavior of heterogenous investors in China, who prefer to trade at different times compared with those in the US market. The unique T+1 trading rule may be causing institutions to trade actively at market open. Our results are robust for the different measures of institutional investors.
The second essay, A Closer Look at Intraday Return Reversals in China: The Role of Retail Investors, investigates the relationship between the intensity of intraday return reversals and future stock returns in the Chinese stock market. The abnormal frequency of positive overnight returns, followed by negative daytime returns, positively predicts the one-month ahead returns. Additional evidence supports our conjecture that daytime noise traders trade against high opening prices to an extent below firms’ fundamentals. As a result, higher price errors are generated during a prolonged, intense tug of war, yielding a strong return prediction.
The third essay, Short Selling, Margin Buying, and Stock Return Predictability, explores whether information from short selling and margin buying predicts future stock returns in the Chinese stock market. The result shows that, before August 2015, short selling had negative predictive power on stock returns in the following month, although this predictability was not long lasting. In contrast, margin buying predicted significant positive future returns in the following week/month, but the sign of the prediction reversed after China Securities Regulatory Commission imposed a tight policy in August 2015. According to our rationale, the T+1 shorting ban drove out many informed leveraged traders, leaving mostly irrational ones in the market.
|Date of Award
|12 Nov 2022
|Ying Jiang (Supervisor) & Wei Huang (Supervisor)
- overnight return
- intraday return
- short selling