Informed Trading and Liquidity in the Shanghai Stock Exchange

33 Pages Posted: 17 Jan 2008 Last revised: 10 Nov 2008

See all articles by Woon K. Wong

Woon K. Wong

IMRU, Cardiff Business School

Dijun Tan

University of Electronic Science and Technology of China (UESTC)

Yixiang Tian

University of Electronic Science and Technology of China (UESTC)

Date Written: January 28, 2008

Abstract

Dufour and Engle (J. Finance (2000) 2467) find evidence of increased presence of informed traders when the NYSE markets are most active. No such evidence, however, can be found by Manganelli (J. Financial Markets (2005) 377) for the infrequently traded stocks. This article investigates the issue of informed trading and its relation to liquidity in Shanghai Stock Exchange. Consistent with the hypothesis that information-based trade exists for all stocks, our findings suggest an increased presence of informed trading in both liquid and illiquid stocks when markets are active. Moreover, for the actively traded stocks, our results support the price formation model of Foster and Viswanathan (Rev. Financial Studies (1990) 593) that activities of informed traders deter uninformed investors from trading, thereby reducing market liquidity.

Keywords: Informed trading, Liquidity trading, Duration, Volume, Volatility

JEL Classification: G11, G14, G15

Suggested Citation

Wong, Woon K. and Tan, Dijun and Tian, Yixiang, Informed Trading and Liquidity in the Shanghai Stock Exchange (January 28, 2008). International Review of Financial Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1084794 or http://dx.doi.org/10.2139/ssrn.1084794

Woon K. Wong (Contact Author)

IMRU, Cardiff Business School ( email )

Cardiff CF10 3EU
United Kingdom

Dijun Tan

University of Electronic Science and Technology of China (UESTC) ( email )

No.4, Section 2, North Jianshe Road
Chengdu, Chengdu
China

Yixiang Tian

University of Electronic Science and Technology of China (UESTC)

No.4, Section 2, North Jianshe Road
Chengdu, Chengdu
China

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