Speculative Trading and Stock Prices: Evidence from Chinese

beliefs on trading volume and stock prices. Chinese stock markets are … Trading was new to most domestic investors and excitement ….

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The market dynamics of technology stocks in the late 1990s have stimulated a growing body of theory that analyzes the joint effects of short-sales constraints and heterogeneous beliefs on stock prices and trading volume. This paper examines several implications of these theories using a unique data sample from a market with stringent short-sales constraints and perfectly segmented dual-class shares. The identical rights of the dual-class shares allow us to control for stock fundamentals. We find that trading caused by investors speculative motives can help explain a significant fraction of the price difference between the dual-class shares

We analyze a data sample from a market with perfectly segmented dual-class shares to test the implications of the presence of short-sales constraints and heterogeneous beliefs on asset prices and trading volume. Using the foreign-share prices to control for variations in firms’ fundamentals, we find several results consistent with the existence of a speculative component in the prices of domestic shares. First, the price difference between a firm\’s domestic and foreign shares was positively related to the turnover rate of the domestic share. Second, this positive association still holds after controlling for several alternative effects, such as liquidity, risk premium, and discount rates. Third, the price difference between domestic and foreign shares increased with firms’ idiosyncratic return volatility and decreased with the float of domestic shares. The turnover rate of domestic shares increased with idiosyncratic return volatility and decreased with their float. We also provide further evidence through an analysis of a policy shift.
In many aspects, the price dynamics of the newly emerged Chinese market resembled the technology bubble in the U.S. Our paper, using an entirely different data source, confirms that investors’ speculative trading is an important determinant of stock prices during bubbles, e.g., Cochrane (2003), Lamont and Thaler (2003a) and Ofek and Richardson (2003).

Download Speculative Trading and Stock Prices: Evidence from Chinese pdf from www.princeton.edu, 31 pages, 385.31KB.
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