Information Diffusion, Transaction Costs, and the Performance of Technical Trading Rules in the Emerging Stock Markets of China

Abstract:     
We examine the performance of technical trading rules in the emerging Chinese stock markets. After controlling for non-synchronous trading and transaction costs, we find significant evidence to support the predictability and profitability of technical rules for Chinese foreign B-shares but not for domestic A-shares. The index returns of B-shares can be explained by one-day-lagged own market trading signals, but not by the trading signals emitted from the corresponding A-share market or from the U.S. market (a proxy for the international market). However, after February 19, 2001, when domestic investors were allowed to trade B-shares, the predictive power of the trading rules in B-share markets disappeared. We conclude that the predictability of technical trading rules in B-share markets can be attributed to the gradual diffusion of information among foreign investors under the foreign share ownership restriction, and, partly, to positive autocorrelations induced by thin trading.

Keywords: Trading rules, Information diffusion, Transaction costs, Ownership restriction

JEL Classifications: G12, G14, G15, C61

Working Paper Series