Day and Night Returns for Chinese Stocks

Abstract

Compared to US stocks, Chinese stocks earn most of the returns during the day. We extend previous findings by Qiao and Dam (2020) arguing that the absence of day trading in the Chinese stock markets explains these differences and argue that these differences reflect an illiquidity premium. We estimate difference-in-differences regressions comparing affected Chinese A-class stocks to unaffected Chinese B-class stocks and propensity-score matched Japanese stocks two years pre and post the day trading ban in 1995. We find an increase in day returns (especially, for previously liquid stocks), a decrease in night returns, and unchanged 24-hour returns. Using data from 1999 to 2014, we rule out risk-based explanations and we show that Chinese stock returns exhibit momentum during the night. Overall, these findings help explain how illiquidity and day trading affects stock prices.