Download Turnover Rate and Speculative Bubble: Empirical Study

Advanced Materials Research
ISSN: 1662-8985, Vols. 457-458, pp 810-814
doi:10.4028/www.scientific.net/AMR.457-458.810
© 2012 Trans Tech Publications, Switzerland
Online: 2012-01-24
Turnover Rate and Speculative Bubble: Empirical Study on A-H Share of
Dual-listed Companies
Zhang Yang1, a, Bai Wei2,b
1
Department of Public Economics, Xiamen University, Xiamen, China
2
Department of Public Economics, Xiamen University,Xiamen, China
a
[email protected], [email protected]
Keywords: turnover rate; speculative bubble; A-H share
Abstract. In existing researches on the spread of A-H share dual-listed companies, turnover rate is
generally regarded as a proxy for liquidity, which ignores the speculative meaning of turnover. In fact,
high turnover rate often reflects strong speculative characteristics of investors in A share market. In
this paper the true meaning of turnover rate is considered that it’s unreasonable to use turnover rate as
a proxy for liquidity. The turnover rate of dual-listed companies is not reflected as liquidity but
speculation in A share market. And the meaning of turnover rate of dual-listed companies is not clear
in H share market.
I. Introduction
Turnover rate is regarded as an important trading indicator in stock market, which includes the
meaning of liquidity and speculation. From the perspective of liquidity, turnover rate measures the
length of time of stocks held by investors. It’s generally believed that the higher turnover rate, the
more liquid. Amihud and Mendslson (1986)[1] considered that in equilibrium conditions illiquid
stocks are held long by investors. Turnover rate is regarded as an indicator of the length of time of
stocks held by investors, which can reflect the liquidity. One the one hand turnover rate is easy to get,
one the other hand there is inherent defect using liquidity to measure the relative bid-ask spread in the
empirical study, and so turnover rate is usually selected as liquidity indicator. Amihud and
Mendelson(1986) pointed out that there is non-linear characteristics if using the relative bid-ask
spread as a measurement of liquidity. So turnover rate is a better proxy.
From the perspective of speculation, the most significant external manifestation of investors'
overconfidence is frequent trading. Because turnover rate of stock measures the frequency of trading,
it objectively reflects the psychological characteristics of investors’ overconfidence. Turnover rate is
widely used as a proxy variable for speculative characteristic in related researches. If there are
different expectations for stock price among investors and lack of short selling mechanism, investors
have option of resale stock to other investors in higher valuation to get profit (Morris (1996)[2],
Scheinkman, Xiong(2003)[3], Hong, Scheinkman and Xiong(2003)[4]).The price of the optional of
resale is the part of speculative bubble in the stock price. According to the detailed analysis of the
speculative bubble mechanism, we consider that turnover rate could be used as a proxy variable for
volatility of investors’ opinions and it’s closely related to speculative bubble.
II. Turmover Rate, Speculative Factors and the Spread of A-H Share
According to the theory of the mechanism of speculative bubble, there are two necessary
conditions to generate speculative bubble. The first one is that there are a large number of
overconfident investors; the other one is lack of short selling mechanism or the cost of short selling is
high. The characteristics of Chinese A share market is well in line with the above two conditions.
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Advanced Materials Research Vols. 457-458
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Firstly, the structure of investors in Chinese capital market is not reasonable. The rate of individual
investor especially medium and small size investor in high, but the scale of institutional investor is
small. Medium and small size investors are dominated by short-term investments and prefer to
frequent trading. The frequent trading of individual investors in stock market reflects the
characteristic of over-confidence.
Secondly, due to lack of short selling mechanism in A share market, it causes rational investors
can’t effectively stabilize the stock price. This also leads to speculative bubble in A share market.
In addition, the turnover rate of A share market is high. The most significant external manifestation
of investors' overconfidence is frequent trading, so turnover rate of market directly reflects the
speculation of market. According to the data from 2000.7 to 2007.4, it shows that the turnover rate is
643% . But turnover rate of America and Hong Kong is 148% and 134% respectively in the same
term. The differences of turnover rate among those also reflect the speculation in A share market.
The origin of speculation in A share market is the structure of investors and the trading mechanism
of the market, so it’s naturally considered that there is speculative bubble in the listed companies
which are A, H share of dual-listed companies. On the contrary, there are many foreign famous
institutional investors in H share market, so investment behavior is more mature than A share market.
In addition, not only short selling exits in Hong Kong stock market, but also stock index future. All of
those have restrained from generating speculative bubble in Hong Kong stock market. Because most
dual-listed companies can be short in Hong Kong stock market, combining with the characteristics of
the Hong Kong market investors, we consider that the speculation of H share market is much less than
A share market.
In summary, speculative bubble of dual-listed companies in A share market is greater than H share
market. So spread of A, H shares of dual-listed companies can be explained by the speculative
differences between A and H share market.
Turnover rate is often used as a proxy for speculative factor in former research. Mei, Scheinkman
and Xiong(2005) found the speculative meaning of turnover rate in researching A, B share dual-listed
companies. Due to face with the same traders and short selling constraints, turnover rate is used as a
proxy for speculative factor in this paper. But the meaning of liquidity and speculation are different in
existing studies. In order to research the effect factors in the spread of A, H share, it’s necessary to
find the true meaning of turnover rate.
The true meaning of turnover rate should be carefully discussed in China stock market.
Zhangzheng, Liuli(2006) made detailed research on the relationship between turnover rate and
liquidity. They consider that turnover rate can’t explain liquidity in China stock market. The main
reason as follow: Firstly, there is low correlation between turnover rate and traditional indexes of
liquidity, such as relative bid-ask spread, but has high correlation with other indexes. Secondly, there
is positive correlation between turnover rate and market value if turnover rate is used as a proxy for
liquidity. It’s generally said that the higher market value, the higher liquidity. There should have
significant positive correlation between turnover rate and relevant market value. But in Zhangzheng
and Liuli’s research, they found negative correlation between turnover rate and relevant market value
in A share market, which is conflict with the explanation of liquidity. The speculative meaning of
turnover rate can explain this negative correlation. Turnover rate is used as a proxy for speculative
factor, which reflects investors’ speculative motive in trading. It’s difficult to get profit through
speculative trading with high market value stock. This condition is reflected in speculators prefer
lower market value stock. So this can explain why existing negative correlation between turnover rate
and market value.
There is significant negative correlation between turnover rate and market value about A, B share
dual-listed companies in A share market, but positive correlation in B share market. This shows the
speculative meaning of turnover rate in A share market and liquid meaning in B share market. The
reality of A share market is also shown that the speculative interpretation of turnover rate is
reasonable. Overconfidence causes investors to make frequent trade, which generates high turnover
rate. So turnover rate reflects the speculative characteristic of investors. On the contrary, liquidity is
shown in turnover rate in developed stock market.
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Although above research is adequate, there is no research on A, H share dual-listed companies
demonstrating similar conclusion. In addition, A, H share dual-listed company is usually high quality
corporate in China. It’s uncertain that turnover rate can manifest speculative characteristic. Based on
extensive literature study and theoretical analysis, two hypotheses are made:
Hypothesis I: The speculative meaning of turnover rate in dual-listed company is reflected in the
negative correlation between turnover rate and market value.
Hypothesis II: The liquid meaning of turnover rate in dual-listed company is reflected in the
positive correlation between turnover rate and market value.
III. Model and Variable Selected
In this model, turnover rate is used as dependent variable and market value is used as independent
variable. The following equations stand for A and H share market respectively.
log(1+Tur-A)= a + b*log(Markcap-A) + e (Eq.1)
log(1+Tur-H)= a + b*log(Markcap-H) + e (Eq.2)
Tur, Vol and Fls indicate turnover rate, volume and the number of tradable shares. Markcap is
market value, and Tur=Vol / Fls .
Cross-sectional regression is used in empirical study, and Fama-Macbeth-t statistic is used in
calculating cross-sectional regression. Fama-Macbeth-t statistic is from Fama and Macbeth’s
research(Fama&MacBeth(1973)[5]), which is widely used in corporate finance. The coefficient of
mean reversion and adjusted R square are shown in the results of regression.
The raw data used in this paper is daily data, which is stock price and market value of 49 dual-listed
companies from 2005-8-1 to 2008-12-31. There are some problems with regression results in short
term because of little changes in daily data. So month data of turnover rate is used in this paper.
IV. Descriptive Statistics
As shown it table 1, the turnover rate of 49 dual-listed companies in A and H share market is 2.81%
and 1.02% respectively. The A share market turnover rate is 2.75 times with H share market. At the
same time, the highest turnover rate is 10.64% in A share market, and it is much higher than H share
market which is 4.94%. The lowest A share market turnover rate is nearly 20 times with the lowest H
share market.
Table 1: Daily Turnover Rate of 49 Dual-listed Companies
All[%]
Turnover Rate
Means
Median
Max
Min
A
2.8158
2.3430
10.6468
0.6450
High Market Value[%]
H
1.0246
0.9291
4.9463
0.0346
A
1.3993
1.0836
5.6278
0.0872
H
0.6240
0.5330
3.2672
0.0532
Low Market Value[%]
A
3.1854
0.6589
11.9826
0.6941
H
1.0974
0.9438
7.3906
0.0320
Table 2: Monthly Turnover Rate of 49 Dual-listed Companies
All[%]
Turnover Rate
Means
Median
Max
Min
A
3.0403
2.1647
7.8521
0.0586
High Market Value[%]
H
1.2197
0.8684
3.6557
0.0614
A
2.5719
1.6353
5.8898
0.0586
H
1.0070
0.8654
1.3531
0.0614
Low Market Value[%]
A
3.3814
2.6210
7.9826
0.2148
H
1.1415
0.8616
9.5628
0.0838
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Compared with high and low market value group, there is significant difference between A and H
share in low market value companies, and A share turnover rate is 3 times with H share market.
Similarly, A share turnover rate is 2 times with H share market in high market value companies. This
shows that A share turnover rate is generally higher than H share market. Monthly turnover rate is
used in this paper, and the descriptive statistics is listed in table 2.
V. Empirical Study
The result of cross-sectional regression in table 3 demonstrates that there is significant negative
correlation between turnover rate and market value in A share market of dual-listed companies. This
is consistent with the interpretation of turnover as speculative variable.
As shown in table 4, the result of cross-sectional regression in H share market indicates that there is
positive correlation between turnover rate and market value, but Fama-Macbeth-t statistic is not
significant. The possible reasons are the following.
The first explanation is that the stocks of dual-listed companies can’t get recognition in Hong Kong
stock market. There are many investment opportunities in Hong Kong stock market, and making H
share investment isn’t required. Most Hong Kong stock market investors have little
acknowledgement with dual-listed companies, and they consider that there is no difference among
others companies.
Table 3: The result of cross-sectional regression used monthly data in A share market
coefficient
α
β
Average R-square
Average coefficient
FM-t
-0.1170***
-7.6673
-0.0028***
-4.5142
0.5245
Table 4: The result of cross-sectional regression used monthly data in H share market
coefficient
α
β
Average R-square
Average coefficient
0.0083
6.54E-05
0.2263
FM-t
1.8911
0.3599
Table 5: The result of cross-sectional regression used quarterly data in A share marke
coefficient
α
β
Average R-square
Average coefficient
0.0843***
-0.0025***
0.6719
FM-t
3.4323
-2.5215
Table 6：The result of cross-sectional regression used quarterly data in H share market
coefficient
α
β
Average R-square
Average coefficient 6.25E-05***
0.0087
0.2363
FM-t
-7.6673
1.2667
*, **, *** means the coefficient is significant respectively at the level of 10%, 5%, 1%.
The other explanation is more reasonable. Institutional investors can use cross-market trading
strategy, and this may generate speculation in H share market. It causes frequent trading and high
turnover rate, and this strategy is mainly used in low market value companies. That’s why there is
negative correlation between turnover rate and market value. In addition, turnover rate can indicate
liquidity in developed market. Although we can’t make a clear distinction between the speculative
meaning of turnover rate and liquidity in H share market, the emphases of this paper is the feature of
dual-listed companies in A share market. So the results of empirical study can support the feature of
turnover rate in A share market.
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To make the results be more credible, quarter data is used to test the cross-sectional model in this
paper. The result is consistent with above and is shown in table 5 and 6.
VI. Conclusion
Based on the interpretation of above model, it’s not reasonable that using turnover rate as proxy for
liquidity in former research on the spread of A, H shares dual-listed companies. The turnover rate of
dual-listed companies is not exhibited liquidity but speculation. The meaning of turnover rate in H
share market is not clear.
Although the speculative meaning of turnover rate has referred in some former research, there is
clear difference between liquidity and speculation. And it is no sense because the two factors have the
same effect on the spread. To investigate the factors which affect spread of A, H share and speculation,
it must control liquidity factors based on original research.
VII. Acknowledgement
Our sincere thanks to 2010 Annual Education Project of Eleventh Five-Year Plan, Fujian province,
(No. FJI10-053, Research on Status Quo and Development of University Technology Innovation),
Chinese Ministry of Education under Grant 08JA790108 and the government of Fujian Province
under Grant 2008B2090.
References
[1] Amihud.Y, H. Mendelson, Asset Pricing and the Bid-Ask Spread, Journal of Financial Economics
Vol.17(1986), p.223
[2] Morris.S, Speculative Investor Behavior and Learning, Quarterly Journal of Economics Vol.110
(1996), p.1111
[3] Scheinkman.J, W.Xiong, Overconfidence and Speculative Bubbles, Journal of Political Economy
Vol. 111(2003), p.1183
[4] Hong.H, J.Scheinkman, W.Xiong, Asset Float and Speculative Bubbles, Working Paper
(2003),Princeton University
[5] Fama.E, J.MacBeth, Risk, Return, and Equilibrium: Empirical Tests, Journal of Political
Economy Vol.81(1973), p.607