Dual State-Space Model of Market Liquidity: The Chinese Experience 2009-2010

35 Pages Posted: 8 May 2020 Last revised: 13 Aug 2020

See all articles by Peter Lerner

Peter Lerner

Wenzhou-Kean University - Wenzhou Kean Business School

Date Written: April 6, 2020

Abstract

This paper proposes and motivates a dynamical model of the Chinese stock market based on a linear regression in a dual state space connected to the original state space of correlations between the volume-at-price buckets by a Fourier transform. We apply our model to the price migration of executed orders by the Chinese brokerages in 2009-2010. We use our brokerage tapes to conduct a natural experiment assuming that tapes correspond to randomly assigned, informed and uninformed traders. Our analysis demonstrates that customers’ orders were tightly correlated — in a highly nonlinear sense of neural networks — with the Chinese market sentiment, significantly correlated with the returns of the Chinese stock market and exhibited no correlations with the yield on bellwether bond of the Bank of China. We did not notice any spike of illiquidity transmitting from the US Flash Crash in May 2010 to trading in China.

Keywords: Market Microstructure, Brokerages, China, Econometrics in Phase Space, Neural Networks

JEL Classification: G12, G23, C45, C58

Suggested Citation

Lerner, Peter, Dual State-Space Model of Market Liquidity: The Chinese Experience 2009-2010 (April 6, 2020). Available at SSRN: https://ssrn.com/abstract=3569901 or http://dx.doi.org/10.2139/ssrn.3569901

Peter Lerner (Contact Author)

Wenzhou-Kean University - Wenzhou Kean Business School ( email )

Kean University (ret.)
Wenzhou, China
Union City, NJ Wenzhou 07083
China

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