[Paper Review] Asymmetric response to PMI announcements in China's stock returns

Yingli Wang, Xiaoguang Yang|arXiv (Cornell University)|Jun 12, 2018

Financial Markets and Investment Strategies28 references3 citations

TL;DR

This study investigates asymmetric stock market reactions to China's Manufacturing Purchasing Managers' Index (PMI) announcements, finding that positive PMI news triggers a positive market reaction one day before the announcement, lasting about three days, particularly under expanding economic conditions. In contrast, negative PMI news elicits no immediate reaction but generates negative returns during economic downturns, especially for small-cap, low-institutional-ownership, or high-P/E stocks, suggesting behavioral biases and potential information leakage in China's retail-dominated market.

ABSTRACT

Considered an important macroeconomic indicator, the Purchasing Managers' Index (PMI) on Manufacturing generally assumes that PMI announcements will produce an impact on stock markets. International experience suggests that stock markets react to negative PMI news. In this research, we empirically investigate the stock market reaction towards PMI in China. The asymmetric effects of PMI announcements on the stock market are observed: no market reaction is generated towards negative PMI announcements, while a positive reaction is generally generated for positive PMI news. We further find that the positive reaction towards the positive PMI news occurs 1 day before the announcement and lasts for nearly 3 days, and the positive reaction is observed in the context of expanding economic conditions. By contrast, the negative reaction towards negative PMI news is prevalent during downward economic conditions for stocks with low market value, low institutional shareholding ratios or high price earnings. Our study implies that China's stock market favors risk to a certain extent given the vast number of individual investors in the country, and there may exist information leakage in the market.

Motivation & Objective

• To examine whether China's stock market exhibits asymmetric reactions to PMI announcements.
• To identify whether positive or negative PMI news generates stronger market reactions.
• To investigate the role of market conditions and firm characteristics (e.g., market cap, institutional ownership, P/E ratio) in shaping these reactions.
• To assess implications for market efficiency and behavioral finance in China’s retail-investor-dominated market.

Proposed method

• Empirical event-study methodology is applied to analyze abnormal stock returns around PMI announcement dates.
• The study uses daily stock returns of A-share firms listed on the Shanghai and Shenzhen exchanges from 2005 to 2017.
• Event windows are constructed around PMI announcements to measure abnormal returns, with a focus on the day before, the announcement day, and up to three days post-announcement.
• Regression models are employed to test the impact of PMI surprises on abnormal returns, stratified by economic regime (expansion vs. contraction) and firm characteristics.
• The analysis distinguishes between positive and negative PMI surprises using the diffusion index and its deviation from the 50-level threshold.
• Information leakage and behavioral biases are inferred from the timing and asymmetry of market reactions.

Experimental results

Research questions

• RQ1 Does the Chinese stock market react asymmetrically to positive versus negative PMI announcements?
• RQ2 Do positive PMI surprises lead to abnormal returns before the announcement date, and if so, why?
• RQ3 Are the market reactions to negative PMI news delayed or absent, and under what market or firm-specific conditions do they emerge?
• RQ4 How do firm-specific characteristics such as market capitalization, institutional ownership, and price-to-earnings ratio moderate the reaction to PMI news?
• RQ5 What does the asymmetric response imply about market efficiency and information processing in China’s retail-driven equity market?

Key findings

• Positive PMI news triggers a positive market reaction one day before the announcement, lasting approximately three days, particularly during periods of economic expansion.
• No significant market reaction occurs in response to negative PMI announcements during expansionary phases.
• Negative PMI news leads to significant negative abnormal returns during economic downturns, especially for small-cap stocks.
• Firms with low institutional ownership and high price-to-earnings ratios exhibit stronger negative reactions to negative PMI news during bear markets.
• The asymmetric response pattern suggests behavioral biases and potential information leakage, as retail investors may anticipate positive news but underreact to negative signals.
• The findings imply that China’s stock market exhibits a risk-seeking bias, consistent with a high concentration of individual retail investors.