Day trading and illiquidity premia: Evidence from China

Abstract

Compared to US stocks, Chinese stocks earn most of the returns during the day. We argue this reflects a shifted illiquidity premium caused by the day trading ban. We estimate difference-in-differences regressions comparing affected Chinese A-class stocks to unaffected Chinese B-class stocks and propensity-score matched Japanese stocks around that ban in 1995. We find an increase in day returns (especially, for previously liquid stocks), a decrease in night returns, and unchanged 24-hour returns. We exclude a risk-based explanation and provide evidence indicating that the time-series illiquidity premium shifts from night to day, while the cross-sectional illiquidity premium diminishes.

Keywords: Chinese Stocks, Day Trading, Day-Night, Illiquidity Premium

JEL Classification: G11, G12, G14