Chinese Financial Market Research Articles

Hierarchical analysis of Chinese financial market based on manifold structure

This paper aims to discuss the fragilities of hierarchical structures of Chinese financial market, and find out the possible faults. We propose an analysis approach to explore the structure characteristics of financial market based on the manifold structure of financial data. First, we extract the underlying manifold embedded in financial time series data by manifold learning, which governs the dynamics of financial system. Second, the surface curvature of manifold is used to serve the quantitative analysis of manifold structure, in which the rate of curvature change is employed to measure the structure fragility. Finally, the dynamics of manifold structures are discussed by Lyapunov exponents, which further explore the fragilities of markets and confirm the conclusions of curvature analysis. In empirical research, we select CSI 300 index as the overall trend indicator of China's financial market, and nine industry indexes as hierarchical market indicators. Our research results indicate that Chinese financial market has less chaotic than the real economy industries, in spite of its high fragility. Some real economic industries are most likely to crash first in the event of a crisis. The findings contribute to present the states of financial markets and provide decision support for investors.

The Role of Hedge Funds in Asset Pricing: Evidence from China

We document that hedge funds nurture mispricing in the Chinese financial market. We exploit the relationship between hedge fund holdings and the degree of mispricing in case that hedge fund holdings of stocks are mainly for arbitrage purpose but not for hedging, and that with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return to 1.78% per month, also impede the dissipation of stock mispricing. Further, we find trend chasing may be the reason why hedge funds prefer to hold overvalued stocks. This research sheds new lights on the information content and potential investment value of hedge funds holdings in emerging markets.

Dynamic Analyses of Contagion Risk and Module Evolution on the SSE A-Shares Market Based on Minimum Information Entropy

The interactive effect is significant in the Chinese stock market, exacerbating the abnormal market volatilities and risk contagion. Based on daily stock returns in the Shanghai Stock Exchange (SSE) A-shares, this paper divides the period between 2005 and 2018 into eight bull and bear market stages to investigate interactive patterns in the Chinese financial market. We employ the LASSO method to construct the stock network and further use the Map Equation method to analyze the evolution of modules in the SSE A-shares market. Empirical results show: (1) The connected effect is more significant in bear markets than bull markets; (2) A system module can be found in the network during the first four stages, and the industry aggregation effect leads to module differentiation in the last four stages; (3) Some stocks have leading effects on others throughout eight periods, and medium- and small-cap stocks with poor financial conditions are more likely to become risk sources, especially in bear markets. Our conclusions are beneficial to improving investment strategies and making regulatory policies.

An Overview of International Capital Flows and Its Impact on Chinese Financial Market

With the acceleration of economic globalization and financial market integration, there has been a gradual increase in the amount of international capital and considerable global movement of capital flow. Due to its inherent uncertainty, immense capital flows, and complex structure, international capital flows have an enormous impact on international trade, finance flowing, and economic development for countries all over the world. This paper aims to provide a full overview of international capital flow, focusing on the internal fluctuation patterns and developing trends in the near future. Through the qualitative analysis of China’s capital flows, this paper also summarizes its major characteristics and multiple effects caused by international capital flows.

Risk Perceptions, Board Networks, and Directors’ Monitoring

What makes independent directors perform their monitoring duty? One possible reason is that they are worried about being sanctioned by regulators if they do not monitor sufficiently well. Using unique features of the Chinese financial market, we estimate the extent to which independent directors’ perceptions of the likelihood of receiving a regulatory penalty affect their monitoring. Our results suggest that they are more likely to vote against management after observing how another director in their board network received a regulatory penalty related to negligence. This effect is long-lasting and stronger if the observing and penalized directors share the same professional background or gender and if the observing director is at a firm that is more likely to be penalized. These results provide direct evidence suggesting that the possibility of receiving penalties is an important factor motivating directors.

Systemic Importance Evaluation of Insurance Group Based on Complex Network of Chinese Financial Market

Systemic Importance Evaluation of Insurance Group Based on Complex Network of Chinese Financial Market

Risk Perceptions, Board Networks, and Directors’ Monitoring

What makes independent directors perform their monitoring duty? One possible reason is that they are worried about being sanctioned by regulators if they do not monitor sufficiently well. Using unique features of the Chinese financial market, we estimate the extent to which independent directors’ perceptions of the likelihood of receiving a regulatory penalty affect their monitoring. Our results suggest that they are more likely to vote against management after observing how another director in their board network received a regulatory penalty related to negligence. This effect is long-lasting and stronger if the observing and penalized directors share the same professional background or gender and if the observing director is at a firm that is more likely to be penalized. These results provide direct evidence suggesting that the possibility of receiving penalties is an important factor motivating directors.

MACROECONOMIC PERSPECTIVE ON CONSTRUCTING FINANCIAL VULNERABILITY INDICATOR IN CHINA

This paper attempts to develop a financial vulnerability indicator for China as a barometer for the state of financial vulnerability in the Chinese financial market, possibly for real-time application. Twelve variables from different sectors are utilised to extract a common vulnerability component using a dynamic approximate factor model. Through the implementation of a Markovswitching Bayesian vector autoregression (MSBVAR) model, the empirical results indicate that a high-vulnerability episode is associated with substantially lower economic activity, but a low-vulnerability episode does not incur substantial changes in economic activity. Notably, the constructed indicator can serve as a real-time early warning system to signify vulnerabilities in the Chinese financial market.

China’s urban construction investment bond: Contextualising a financial tool for local government

This paper examines the Urban Construction Investment Bond (UCIB) as a tradable product in the financial market and a financial tool for local government in China. The development of this financial product is contextualised in infrastructure finance and local government debt. The creation of UCIB helps finance infrastructure investment and potentially reveal the relative risks through the secondary market. The spatial distribution of UCIB demonstrates different relative risks of this financial instrument in local conditions. The government uses this financial tool to bridge the emerging capital market and infrastructure finance, and the Chinese financial market now treats UCIB as an emerging asset class. The development of UCIB has sped up the pace of financialisation in China. Although relative risks help investors choose different UCIBs, the overall risk of UCIB cannot be ignored.

Application of Unbalanced Data Classification Algorithm in Quantitative Financial Risk Management

The global financial crisis that has erupted many times in recent years has not only harmed the financial systems of various countries, but even severely hit the economies of various countries. Therefore, the importance of financial risk early warning has become more prominent and the challenges facing it have become more severe. In view of this, it is very important to explore an extreme risk early warning model that suits the reality of the Chinese financial market, and to accurately predict and prevent extreme financial risks. This article first constructs the model’s early-warning indicator system, and determines the state indicators by synthesizing the two state indicator definition methods based on the crisis period and EVT, in order to determine whether extreme financial risks occur in the financial market at a certain time. The prediction performance of the improved SVM under different unbalanced sample data sets is compared. It is highly feasible to use it for early warning of extreme risks in China’s financial market. This paper presents a BADASYN algorithm based on boundary sample adaptive synthesis at the data level. The algorithm first finds a small number of samples in the class boundary region, then adaptively synthesizes some samples according to their distribution, and adds the newly synthesized samples to the training set. In the data set sampled by BADASYN, the support vector of the trained SVM model is mainly composed of newly synthesized samples, and finally the separation hyperplane is close to multiple types of samples. Experimental research shows that after testing SVMs constructed with four kernel functions, the prediction accuracy of each model is very high, reaching more than 93%, reflecting the stability of SVM prediction performance.

The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry

The circumstances surrounding the outbreak of the COVID-19 pandemic have generated substantial international political strain as governments attempt to mitigate the widespread associated social and economic repercussions. One theory has focused on the potential for Chinese informational asymmetry. Using Chinese financial market data, we attempt to establish the scale and direction of information flows during multiple distinct phases of the development of the pandemic. Two specific results are identified. Firstly, the majority of domestically-traded Chinese stocks present evidence of significant information flows at a far earlier stage than internationally-traded comparatives, suggesting that domestic investors recognised the dangers associated with COVID-19 far in advance of the rest of the world. One potential explanation surrounds the view that the severity of domestically-reported Chinese news was not appropriately recognised by international investors. Secondly, while evidence of safe-haven and flight-to-safety behaviour is evident throughout traditional energy and precious metal markets, cryptocurrencies became informationally-synchronised with Chinese equity markets, indicating their use as an investor safe-haven. This is a particularly concerning outcome for international policy-maker and regulatory authorities due to the fragility of these developing markets.

Is Illegal Insider Trading a Sure Thing? Some New Evidence

ABSTRACT Using a hand-collected database, we evaluate 328 illegal insider trading cases in the Chinese financial market from 2007 to 2018. Insiders, on average, make less profits than a single buy-and-hold strategy in the same period. This low performance is exacerbated when target firms are state-owned and with high institutional ownership. A firm’s size, 6-month past returns, debt ratio, and firm age have marginal impacts on the illegal returns. Two potential mechanisms derived from the US market are tested but they show divergent roles in our model setting. This study calls for alternative mechanisms in understanding market efficiency in emerging markets.

Mixed financing strategies for capital-constrained retailer in the Chinese financial market

Retailers in supply chains usually deal with the problem of capital shortage by obtaining financing from the Chinese financial market. Examining the financing requirement of capital-constrained retailers, this paper studies the optimal decisions of the supplier and retailer in the supply chain, who are both risk-neutral decision-makers under wholesale price contracts. We assume that the retailer may obtain financing from a bank, the supplier and investors. Thus, the retailer can adopt two mixed financing modes: mixed financing of a bank and equity credit and mixed financing of trade and equity credit. We obtain equilibrium decisions under the two financing modes. By comparing the equilibrium results, we find that the mixed financing of trade and equity credit exhibits the only financing equilibrium. A Pareto interval of the wholesale price exists such that both the supplier and retailer can obtain higher profits with the mixed financing of trade and equity credit than the mixed financing of bank and equity credit. Finally, we present a numerical analysis to support our results.

Financial Innovation of the Chinese Financial Markets: New Types of Chattel Pledges

The author examines some of the difficulties relating to chattel pledges in China from a financial innovation perspective. This article finds that: (i) under current Chinese financial practice, legal innovation exists in pledges over bank accounts and dynamic pledges; (ii) the new types of chattel pledge faces difficulties establishment and implement of a pledge; (iii) the numerus clausus principle is called into question and should be relaxed to recognize the new types of chattel pledges by way of a broad interpretation, and party autonomy should be taken into account in the realization of them.

Investor sentiment, issuance cost, and IPO underpricing: an empirical analysis of Shanghai Stock Exchange A-shares

ABSTRACT As the Chinese financial market has recently opened to the world, the high initial public offering (IPO) underpricing rate in the stock market has generated significant concern. This study investigates the impact of investor sentiment and issuing cost on the IPO underpricing rate after listing in various periods. We use the Shanghai Stock Exchange (SSE) A-shares data from 2014 to 2018 and the ordinary least squares (OLS) method to conduct the analysis. The results indicate that, in the first phases, investor sentiment is positively correlated, while the issuance cost is negatively correlated to the IPO underpricing rate. After the company’s listing, investor sentiment gradually becomes the main factor affecting the IPO underpricing rate, and its positive impact increases, while the negative impact of the issuance cost weakens slightly.

A Markov switching SVAR analysis on the relationship between exchange rate changes and stock returns in China

PurposeThis study investigates the spillover effects between exchange rate changes and stock returns in China. The authors find that no significant interconnections exist between stock returns and exchange rates changes.Design/methodology/approachAlthough the conventional structural VAR (SVAR) approach fails to examine the contemporaneous effects, the Markov switching SVAR model captures the volatile structure of the Chinese financial market. The regime-switching estimates indicate that volatile structure tends to be significant during two financial crisis periods.FindingsNotwithstanding the fact that exchange rate changes cannot Granger-cause stock returns in the long run, its contemporaneous spillover effects on stock returns are found to be statistically significant.Originality/valueThis study aims to shed light on the spillover effects between exchange rate changes and stock returns in China, as the Chinese currency is becoming flexible and China’s stock market has undertaken important reforms. The spillovers between the two markets are of topical importance due to the increasing connections between China and the global economy.

Financial stress dynamics in China: An interconnectedness perspective

Since the subprime crisis, financial stress has been subjected to increased attention. However, related research of emerging economics is still in its infancy. Considering that the financial market is quite interconnected due to its complexity, we measure the stress dynamics of the Chinese financial market from an interconnectedness perspective. Multiple manifestations of interconnectedness are first investigated in this paper. It is found that the interbank and bond market are highly connected and play a central role in stress transmission. Then, financial stress is measured with the consideration of the interconnectedness. Finally, the asymmetric and nonlinear economic effects of financial stress are investigated, and thresholds are determined to distinguish between periods of financial stress and normal periods. The Financial Stress Index constructed in this paper effectively captures real-time status and identifies stressed periods, thus contributing to the early warnings and subsequent risk management in China. A systemic but focused strategy is suggested to deal with financial stress.

Quantitative trading system based on machine learning in Chinese financial market

Quantitative trading system based on machine learning in Chinese financial market

The Influence of the COVID-19 Pandemic on Asset-Price Discovery: Testing the Case of Chinese Informational Asymmetry (Online Appendices)

The circumstances surrounding the outbreak of the COVID-19 pandemic have generated substantial international political strain as governments attempt to mitigate the widespread associated social and economic repercussions. One theory has focused on the potential for Chinese informational asymmetry. Using Chinese financial market data, we attempt to establish the scale and direction of information flows during multiple distinct phases of the outbreak. Two specific results are identified. Firstly, the majority of domestically-traded Chinese stocks present evidence of significant information flows at a far earlier stage than internationally-traded comparatives, suggesting that domestic investors recognised the dangers associated with COVID-19 far in advance of the rest of the world as the severity of the domestically-reported Chinese news was not appropriately recognised by international investors. Secondly, while evidence of safe-haven and flight-to-safety behaviour is evident throughout traditional energy and precious metal markets, cryptocurrencies became informationally-synchronised with Chinese equity markets, indicating their use as an investor safe-haven, a concerning outcome for international policy-maker and regulatory authorities due to the fragility of these developing markets.

The Influence of the COVID-19 Pandemic on Asset-Price Discovery: Testing the Case of Chinese Informational Asymmetry

The circumstances surrounding the outbreak of the COVID-19 pandemic have generated substantial international political strain as governments attempt to mitigate the widespread associated social and economic repercussions. One theory has focused on the potential for Chinese informational asymmetry. Using Chinese financial market data, we attempt to establish the scale and direction of information flows during multiple distinct phases of the outbreak. Two specific results are identified. Firstly, the majority of domestically-traded Chinese stocks present evidence of significant information flows at a far earlier stage than internationally-traded comparatives, suggesting that domestic investors recognised the dangers associated with COVID-19 far in advance of the rest of the world as the severity of the domestically-reported Chinese news was not appropriately recognised by international investors. Secondly, while evidence of safe-haven and flight-to-safety behaviour is evident throughout traditional energy and precious metal markets, cryptocurrencies became informationally-synchronised with Chinese equity markets, indicating their use as an investor safe-haven, a concerning outcome for international policy-maker and regulatory authorities due to the fragility of these developing markets. Online Appendices available at: https://ssrn.com/abstract=3623252