Institutional trading in volatile markets: Evidence from Chinese stock markets

We investigate the daily stock returns of all A-shares listed on the Shanghai and Shenzhen stock exchanges over the period 2010-2017. Using daily cash flow data on the largest category of trades by value, we construct a proxy for high-value institutional trading activity. We demonstrate that high-value institutional transactions consistently exacerbate firm-level abnormal stock returns on extreme market movement days. We then highlight the conflating influence of regulator imposed daily limits on firm-level stock price movements and conclude that binding price limits act to exacerbate the destabilizing effects associated with high-value institutional trades in Chinese stock markets.

Automated summary

The study reveals that high-value institutional trades exacerbate abnormal stock returns on extreme market movement days, and that regulator imposed price limits further amplify the destabilizing effects associated with these trades in Chinese stock markets.