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The Bear Market In China: Which Trades Push The Stock Prices Down?

Author

Listed:
  • JINGHAN CAI

    (Department of Economics, Boston College, USA)

  • HONGBING OUYANG

    (School of Economics, Huazhong University of Science and Technology, Wuhan, China)

  • MICHAEL CHAK SHAM WONG

    (Department of Economics and Finance, City University of Hong Kong, Hong Kong)

Abstract

This paper considers informed traders' trading strategy in a bear market. Known as stealth trading, informed traders use medium-size trades, which tend to contain more information than small and large trades, and have stronger impact on stock price movement. Using the transaction data provided by CSMAR database, we document the strong pattern of stealth trading in the Chinese stock market from June 1, 2004 to May 31, 2005, which is: (1) an order-driven market; (2) a market that has only limit orders; (3) a bear market; (4) a market with no corresponding derivative market and (5) a market with short-sale constraint. The empirical results add further evidence on stealth trading, in which informed traders tend to use medium-size trades, supported by the evidence that price movements are mainly due to medium-size trades. We find that the pattern in a bear market is highly consistent with that in a bull market. It is further documented that there is strong interaction between the stealth trading hypothesis and the order imbalance hypothesis, suggesting that the order imbalance effect should be considered when confirming the existence of stealth trading, or the levels of stealth trading.

Suggested Citation

  • Jinghan Cai & Hongbing Ouyang & Michael Chak Sham Wong, 2011. "The Bear Market In China: Which Trades Push The Stock Prices Down?," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-22.
    • Handle: RePEc:wsi:afexxx:v:06:y:2011:i:01:n:s2010495211500023
    DOI: 10.1142/S2010495211500023
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    Keywords

    Stealth trading; price impacts; bear market; microstructure; G12; G14; D82;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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