Dynamic relation of Chinese stock price-volume pre- and post- the Split Share Structure Reform

Dong-Hua Wang, Nan Qing, Man Lei and Xiaohui Chang

China Finance Review International, 2015, vol. 5, issue 4, 386-401

Abstract: Purpose - – The purpose of this paper is to identify the bull and bear regimes in Chinese stock market and empirically analyze the dynamic relation of Chinese stock price-volume pre- and post- the Split Share Structure Reform. Design/methodology/approach - – The authors investigate the price-volume relationship in the Chinese stock market before and after the Split Share Structure Reform using Shanghai Composite Index daily data from July 1994 to April 2013. Using a two-state Markov-switching autoregressive model and a modified two-state Markov-switching vector autoregression model, this study identifies bull or bear market and also examine the existence of regime-dependent Granger causality. Findings - – Using a two-state Markov-switching autoregressive model, the authors detect structural changes in the market volatility due to the reform, and find evidence of a positive rather than an asymmetric price-volume contemporaneous correlation. There is a strong dynamic Granger causal relation from stock returns to trading volume before and after the reform regardless of the market conditions, but the causal effects of volume on returns are only seen in the bear markets before the reform. The model is robust when using different stock indices and time periods. Originality/value - – The work is different from previous studies in the following aspects: most of the existing empirical literature focus on the well-developed economies, but our interest lies in the emerging Chinese market that has witnessed rapid growth in the past decade; in contrast to many works in the literature that examine the price-volume relationship during one market condition, the authors compare the relationship in a bull market with that in a bear market, using a two-state MS-AR model; the authors also employ a modified two-state Markov-switching vector autoregression model to examine the existence of regime-dependent Granger causality; as the most massive systematic reform for the Chinese stock market since its inception in 2005, the Split Share Structure Reform has a profound impact on the Chinese stock market, thus it is of vital importance to explore its effects on both the price-volume relationship and the market structure.

Keywords: Granger causality test; Markov-switching autoregressive model; Price-volume relationship; Split share structure reform (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:v:5:y:2015:i:4:p:386-401

DOI: 10.1108/CFRI-03-2015-0024

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