Abstract
Stock returns in China exhibit significant co-movement with provincial return indices after controlling for the industry effect, consistent with local co-movement findings in the United States. The magnitude of such co-movement increases with participation in trading by local investors. Trading activities of individual stocks also co-vary with provincial volume. The last two findings support the roles of investor behaviour in explaining the local return co-movement phenomenon.
Notes
1 Except for the clustered listings in two provinces, Shanghai and Guangdong
2 Source: Chinese securities regulatory commission (CSRC), http://www.csrc.gov.cn/
3 Although there are two major types of shares available in the market (type-A and type-B), the market of A shares represent the Chinese mainstream and domestic stock market in terms of size and trading activity. Nevertheless, our tests on both A and B shares produce similar results.
4 Individuals are allowed to open only one brokerage account at any of regional branches in order to trade SHSE stocks, and the account is opened using their National Identity Card. Investors, however, are allowed to open more than one account at a different branch for trading SZSE stocks. The number of investor accounts with SZSE, therefore, is not an accurate measure of investor participation.
5 This reduces the sample to 1259 firms as we need to delete industries with very few firms.
6 We believe that the second industry classification used in models 7–9 is more reliable. Results based on models 1–6 are available upon request.
