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Institutional trading in volatile markets: evidence from Chinese stock markets

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  • Julia Darby

    (Department of Economics, University of Strathclyde)

  • Hai Zhang

    (Department of Accountanty & Finance, University of Strathclyde)

  • Jinkai Zhang

    (Department of Economics, University of Strathclyde)

Abstract

We investigate daily stock returns of all firms listed on the Shanghai and Shenzhen stock exchanges over the period 2010-2017. Using daily cash flow data on the largest category of trades by value we construct a proxy for institutional trading and demonstrate that institutional trading behaviour consistently destabilizes both markets on extreme market movement days. We go on to highlight the conflating influence of regulator imposed daily limits to individual stocks’ price movements. Specifically, showing that when large institutional trades coincide with upper (lower) price limits being hit on extreme days, the prices of affected stocks continue to increase (decrease) significantly in subsequent days, such that institutional trades on extreme days help predict subsequent abnormal returns. While there is some evidence of longer-run price reversal after stocks hit the lower price limits, this is not the case when upper limits are hit. We conclude that binding price limits act to exacerbate the destabilising effects of institutional trading in Chinese stock markets.

Suggested Citation

  • Julia Darby & Hai Zhang & Jinkai Zhang, 2019. "Institutional trading in volatile markets: evidence from Chinese stock markets," Working Papers 1912, University of Strathclyde Business School, Department of Economics.
    • Handle: RePEc:str:wpaper:1912
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    1. Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2021. "Anomalies in the China A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    extreme market swings; price limits; cash flow; institutional trading behaviour;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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