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The overnight return puzzle and the “T+1” trading rule in Chinese stock markets

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  • Qiao, Kenan
  • Dam, Lammertjan

Abstract

Overnight returns in Chinese stock markets are on average negative. This overnight return puzzle appears to be unique to Chinese markets. We hypothesize that a particular arrangement in Chinese stock markets explains the puzzle: the “T+1” trading rule. T+1 trading prohibits traders from selling the shares they bought on the same day. This restriction leads to a discount on daily opening prices. We find empirical support that the T+1 induced discount explains the overnight return puzzle and estimate the average T+1 discount at 14 bps. In addition, we establish that the T+1 discount contributes significantly to overnight risk.

Suggested Citation

  • Qiao, Kenan & Dam, Lammertjan, 2020. "The overnight return puzzle and the “T+1” trading rule in Chinese stock markets," Journal of Financial Markets, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finmar:v:50:y:2020:i:c:s1386418120300033
    DOI: 10.1016/j.finmar.2020.100534
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    Cited by:

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    3. Lin, Chaonan & Chang, Hui-Wen & Chou, Robin K., 2023. "Overnight versus intraday returns of anomalies in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    4. Gao, Ya & Han, Xing & Li, Youwei & Xiong, Xiong, 2021. "Investor heterogeneity and momentum-based trading strategies in China," International Review of Financial Analysis, Elsevier, vol. 74(C).
    5. Qiu, Jiayan & Huang, Wei & Jiang, Ying, 2023. "When do they trade? Heterogeneous investors in China," Finance Research Letters, Elsevier, vol. 54(C).
    6. Corbet, Shaen & Hou, Yang & Hu, Yang & Oxley, Les, 2020. "The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry," International Review of Financial Analysis, Elsevier, vol. 72(C).
    7. Peter B. Lerner, 2022. "Fourier Integral Operator Model of Market Liquidity: The Chinese Experience 2009–2010," Mathematics, MDPI, vol. 10(14), pages 1-25, July.
    8. Chen, Zhiyu & Xu, Yun & Wang, Yu, 2023. "Can convertible bond trading predict stock returns? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    9. Kang, Junqing & Lin, Shen & Xiong, Xiong, 2022. "What drives intraday reversal? illiquidity or liquidity oversupply?," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    10. Zhuwei Li & Xuejiao Lu & Yuan Fu, 2022. "Interaction influence of trading rules on the quality of stock markets: the price limit rule and day trading rule from the Shanghai and Shenzhen Stock exchanges," Applied Economics, Taylor & Francis Journals, vol. 54(56), pages 6467-6479, December.
    11. Xiong, Xiong & Meng, Yongqiang & Joseph, Nathan Lael & Shen, Dehua, 2020. "Stock mispricing, hard-to-value stocks and the influence of internet stock message boards," International Review of Financial Analysis, Elsevier, vol. 72(C).
    12. Yahui An & Lin Huang & Youwei Li, 2022. "The Asymmetric Overnight Return Anomaly in the Chinese Stock Market," JRFM, MDPI, vol. 15(11), pages 1-20, November.
    13. P. B. Lerner, 2020. "Dual State-Space Model of Market Liquidity: The Chinese Experience 2009-2010," Papers 2004.06200, arXiv.org, revised May 2020.

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    More about this item

    Keywords

    Overnight return puzzle; T+1 trading rule; T+1 discount; Market micro structure;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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