Institutional trading in volatile markets: evidence from Chinese stock markets

Julia Darby, Hai Zhang () and Jinkai Zhang ()
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Hai Zhang: Department of Accountanty & Finance, University of Strathclyde
Jinkai Zhang: Department of Economics, University of Strathclyde

No 1912, Working Papers from University of Strathclyde Business School, Department of Economics

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.

Keywords: extreme market swings; price limits; cash flow; institutional trading behaviour (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G14 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-09
New Economics Papers: this item is included in nep-mst and nep-tra
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Journal Article: Institutional trading in volatile markets: Evidence from Chinese stock markets (2021)
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