Financial Anomalies in Emerging Markets: The Case of China

Abstract

Financial anomalies in emerging markets can be caused by forces that are very different from that in mature markets. In a GARCH model, we investigate the political aspect of financial anomalies and show that financial anomalies can be caused by political intervention. In the case of China, while there is no evidence for the January effect or the Chinese New Year effect, returns abnormality is found to occur in March when China is in the political high season. This March effect is likely a result of political manoeuvre by the government to make the appearance of a stable and thriving stock market, which serves the political purpose of preventing social resentment in a politically sensitive time. This case study shows political window dressing can be an important cause of financial anomalies.