Market liberalization and the extent of informed trading: Evidence from China's equity markets

In this study we investigate changes in the extent of speculative (informed) trading in China's equity markets around market liberalization. To do so, we examine the dynamic relation between trading volume and stock returns' autocorrelation of all individual stocks traded in mainland China's equity markets between 1995 and 2010. We develop a “Trade Informativeness” index that tracks changes in the magnitude of informed trading over time. Our results show that the extent of speculative trading has eroded as a result of market liberalization. We also find some evidence that stock returns are more reflective of market fundamentals post market liberalization. Both findings suggest an improvement in the informational efficiency of the Chinese stock markets.