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

Kenan Qiao and Lammertjan Dam

Journal of Financial Markets, 2020, vol. 50, issue C

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.

Keywords: Overnight return puzzle; T+1 trading rule; T+1 discount; Market micro structure (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.finmar.2020.100534

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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