Market Liquidity And Short-term Fluctuation

Contrary to my intuition, the Chinese markets, which are much lower in trading volume than those in US, actually has lower short-term fluctuation, as shown in my earlier post. I guess it is due to the availability of "news" or data available to the market: in US there are all kinds of often-conflicting news and opinions on a daily basis, pulling the market in opposite directions, in an effect making the market more efficient [the dot-com era was an exception]. In China, however, where there is little reliable economic and business data available to the public, it is the market momentum (the crowd effect) that plays a more important role in the short-term market direction. It is common in China that even the real economic data, such as changes in interest rate, GDP and employment data do not have any impact on the market at all.

However, the crowd effect tends to make the market go to the extreme - albeit in a steady fashion - so it has to correct itself later to reflect the market fundamentals. As a result, the longer term variation, such as that of annual return, of the less-liquid markets as China's is greater than those in the US.

The Chinese media - print, TV and Internet - are all filled with so called security analyses that are really technical analysis at best, and more likely frauds and scams in disguise - a remarkable difference from what's in the US media which are more entertaining and somewhat honest (except for some corrupt stock analysts that upgrade and downgrade stocks).