Positive Feedback Trading in Chinese Stock Markets : Empirical Evidence From Shanghai, Shenzhen, and Hong Kong Stock Exchanges

This paper examines investors' trading behaviors in Chinese stock markets by studying five stock indices that cover Chinese common stocks in three stock exchanges — Shanghai, Shenzhen, and Hong Kong. Our empirical results suggest that there exists a significant positive feedback trading effect in the Shanghai A-share, Shenzhen A- and B-share, and Hong Kong H-share markets. No significant positive feedback trading behavior was observed in the Hong Kong Red chip stock market. Consistent with prior literature, our empirical results suggest that the positive feedback trading effect in Chinese markets is asymmetrical between market upturns and downturns and that stock returns exhibit positive autocorrelation at a low volatility level and negative autocorrelation at a high volatility level. This finding is attributed to wealth-related variation in investors' risk aversion level and to market segmentation in Chinese stock markets. In addition, we examine the impact of deregulation of the B-share market on trading behaviors and find that the asymmetric return autocorrelation pattern of the market has changed since the deregulation. This finding should be of interest to portfolio managers and policy makers