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An Empirical Analysis of the Shanghai and Shenzen Limit Order Books

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  • Huimin Chung
  • Jie Lu
  • Bruce Mizrach

Abstract

This paper investigates the market microstructure of the Shanghai and Shenzhen Stock Ex- changes. The two major Chinese stock markets are pure order-driven trading mechanisms without market makers, and we analyze empirically both limit order books. We begin our empirical model- ing using the vector autoregressive model of Hasbrouck and extend the model to incorporate other information in the limit order book. We also study the market impact on A shares, B shares and H shares, and analyze how the market impact of stocks varies cross sectionally with market capital- ization, tick frequencies, and turnover. Furthermore, we distinguish the market impacts of small, average and block trades, and conclude that the market impacts of small trades are signi?cantly lower than those of other trades.

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File URL: http://www1.wiwi.uni-muenster.de/cqe/forschung/publikationen/cqe-working-papers/CQE_WP_1_2009.pdf
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Bibliographic Info

Paper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 0109.

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Length: 18 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cqe:wpaper:0109

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Keywords: limit order book; Chinese stock market; microstructure; VAR model;

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  1. Ng, Lilian & Wu, Fei, 2007. "The trading behavior of institutions and individuals in Chinese equity markets," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2695-2710, September.
  2. Bruce Mizrach, 2008. "The next tick on Nasdaq," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 19-40.
  3. Shenoy, Catherine & Zhang, Ying Jenny, 2007. "Order imbalance and stock returns: Evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(5), pages 637-650, December.
  4. Chunyang Zhou & Chongfeng Wu & Li Yang, 2011. "The Informational Role of Stock and Warrant Trades: Empirical Evidence from China," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(0), pages 78-93, January.
  5. Kalok Chan & Y. Peter Chung & Wai-Ming Fong, 2002. "The Informational Role of Stock and Option Volume," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1049-1075.
  6. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
  7. Cai, Bill M. & Cai, Charlie X. & Keasey, Kevin, 2006. "Which trades move prices in emerging markets?: Evidence from China's stock market," Pacific-Basin Finance Journal, Elsevier, vol. 14(5), pages 453-466, November.
  8. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  9. Soeren Hvidkjaer, 2008. "Small Trades and the Cross-Section of Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1123-1151, May.
  10. Bailey, Warren & Cai, Jun & Cheung, Yan Leung & Wang, Fenghua, 2009. "Stock returns, order imbalances, and commonality: Evidence on individual, institutional, and proprietary investors in China," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 9-19, January.
  11. Dufour, Alfonso & Engle, Robert F, 1999. "Time and the Price Impact of a Trade," University of California at San Diego, Economics Working Paper Series qt62c0h04j, Department of Economics, UC San Diego.
  12. Xu, Cheng Kenneth, 2000. "The microstructure of the Chinese stock market," China Economic Review, Elsevier, vol. 11(1), pages 79-97.
  13. Brad M. Barber & Yi-Tsung Lee & Yu-Jane Liu & Terrance Odean, 2009. "Just How Much Do Individual Investors Lose by Trading?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 609-632, February.
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