The Bear Market in China: Which Trades Push the Stock Prices Down?

This paper considers informed traders' trading strategy in a bear market. Known as stealth trading, informed traders use medium-size trades, which tend to contain more information than small and large trades, and have stronger impact on stock price movement. Using the transaction data provided by CSMAR database, we document the strong pattern of stealth trading in the Chinese stock market from June 1, 2004 to May 31, 2005, which is: (1) an order-driven market; (2) a market that has only limit orders; (3) a bear market; (4) a market with no corresponding derivative market and (5) a market with short-sale constraint. The empirical results add further evidence on stealth trading, in which informed traders tend to use medium-size trades, supported by the evidence that price movements are mainly due to medium-size trades. We find that the pattern in a bear market is highly consistent with that in a bull market. It is further documented that there is strong interaction between the stealth trading hypothesis and the order imbalance hypothesis, suggesting that the order imbalance effect should be considered when confirming the existence of stealth trading, or the levels of stealth trading. © 2011 World Scientific Publishing Company.