Previous studies have noted China’s stock markets are more volatile than more developed peers; but the paper highlighted today, from Julia Darby and Jinkai Zhang at the University of Strathclyde in Glasgow, addresses the why of this.
By analyzing the Shanghai and Shenzhen markets from 2010 to 2017 and comparing them to the U.S. and the U.K. they find the same exaggerated volatility others have noted but their study then drills down to the individual stock level for a closer look.
Three factors, particularly pronounced in their study but not uncommon in other developing markets, seem to explain the phenomenon; videlicet?
- Government control. A company with a dominant shareholder that’s a government agency tends to be parsimonious with its updates. This poor-information-soil is especially fertile for the raising of and maintaining high stock price volatility.
- Single dominant shareholder or group. Sort of the same problem as above but in this case its the founder/owner and friends/family in non-SOEs that’s the informational bottleneck. As above this leads to wilder stock price swings over longer time periods.
- Non-dominance of institutional investors. A developing market, is, well, developing. The absence of institutionalized savers and firms means stock markets in such places are pushed around by Mom and Pop investors: a notoriously fickle constituency.
Unlike other studies the researchers are less sanguine about the prospects for material change anytime soon. They note a growing body of professional analysts and institutional shareholders but believe for as long as these markets remain, day to day, jockeyed by punters things are unlikely to alter.
As they so decorously put it in their concluding remarks “So long as their [China’s stock markets] retail investors’ trades are primarily driven by sentiment and influenced by expectations of political intervention, the demand for better information from this segment of the market, and whether information would be used if provided, is unclear.” Ahem! Quite.
You can access the work in full via the following link Stock Market Volatility in China.
Happy Sunday.