A Unique 'T+1 Trading Rule' in China: Theory and Evidence

by Ming Guo, Zhan Li, Zhiyong Tu

ARTICLE | Journal of Banking & Finance | Vol. 36, 2012

Abstract

Unique to the world, China adopts a ‘‘T + 1 trading rule’’, which prevents investors from selling stocks bought on the same day. We develop a dynamic price manipulation model to study the effects of the ‘‘T + 1 trading rule’’. Compared to the ‘‘T + 0 trading rule’’, which allows investors to buy and sell the same stocks during the same day, we show that the ‘‘T + 1 trading rule’’ reduces the total trading volume and price volatility, and improves the trend chasers’ welfare when trend-chasing is strong. An empirical test using data on China’s B-share stock market supports the model’s theoretical predictions.

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A Unique 'T+1 Trading Rule' in China: Theory and Evidence

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