Homemade Foreign Trading

62 Pages Posted: 5 Jan 2023 Last revised: 1 Feb 2023

See all articles by Zhiguo He

Zhiguo He

Stanford University - Knight Management Center

Yuehan Wang

Central University of Finance and Economics (CUFE) - School of Finance

Xiaoquan Zhu

University of International Business and Economics - School of Banking and Finance

Date Written: January 27, 2023

Abstract

Using cross-border holding data from all custodians in China’s Stock Connect, we provide evidence that Chinese mainland insiders tend to evade the see-through surveillance by round-tripping via the Stock Connect program. After the regulatory reform of Northbound Investor Identification in 2018, the correlation between insider trading and northbound flows decays, and so does the return predictability of northbound flows. The reduction of return predictability is especially pronounced among less prestigious foreign custodians and cross-operating mainland custodians, behind which mainland insiders are more likely to hide. Our analysis sheds light on the role of regulatory cooperation over capital market integration.

Keywords: Cross-border Flows, Insider Trading, Northbound-Southbound, See-through Surveillance, Regulatory Arbitrage

JEL Classification: F38, F65, G11, G14, G15, G28

Suggested Citation

He, Zhiguo and Wang, Yuehan and Zhu, Xiaoquan, Homemade Foreign Trading (January 27, 2023). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-170, Available at SSRN: https://ssrn.com/abstract=4318182 or http://dx.doi.org/10.2139/ssrn.4318182

Zhiguo He (Contact Author)

Stanford University - Knight Management Center ( email )

655 Knight Way
Stanford, CA 94305-7298
United States

Yuehan Wang

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Xiaoquan Zhu

University of International Business and Economics - School of Banking and Finance ( email )

China

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