Recent theoretical studies (Aggarwal and Wu,2006; Mei,Wu and Zhou,2004) show that trade-based stock price manipulation is a possible source of the momentum effect. This paper proposes three sets of testable hypotheses and provides empirical evidence for a manipulation-based explanation of momentum.Using weekly data on 14 CITIC industries in the Shanghai A-share market from 1997 to 2006, our analysis of industry momentum shows that cumulative returns first increase then decrease across holding periods, and the returns monotonically decrease across formation periods. This return pattern is consistent with a so-called”pump and dump”scheme,where momentum is created by manipulators and chased by speculators. We attribute the source of momentum to the positive own-autocorrelation, which dominates the cross-autocorrelation effect of industry returns. We also find that momentum profits are higher in the bull than in bear market, and most of the profits come from the gains of winning industries rather than the losses of losing industries. These empirical results,when related to some well-documented behavioral biases of Chinese speculators,tell us a possible stock-market manipulation story of momentum.

Imposed trading constraints act as an exogenous source of illiquidity, prevent free trading of restricted shares and make them be priced at a discount relative to their freely-traded counterparts with identical dividends and voting rights from the same listed firms. This paper numerically solves the theoretical illiquidity discounts for the case of long constraint horizons and then reconciles the contradictions in the results of various frameworks by identifying the effects of the unlimited and costless borrowings assumed in Longstaff (2001). With control of leveraged positions, illiquidity discounts increase with the volatility, and their size is greatly diminished. We also empirically test the theories within the unique setting of China, which has virtually the largest population of restricted shares worldwide. Large discounts are documented in two forms of transactions in restricted shares: namely auctions and transfers. The results empirically verify the theoretical findings by showing that illiquidity discounts in auctions increase with both the volatility and constraint horizons. The results from transfers, however, are not significant as the transfers are made privately and may be subject to price manipulation when the involved parties are related.

Stock price manipulations may be an important clue for us to understand many unique phenomena related to Chinese stock market, but we can hardly find any literature like this due to the difficulty to measure manipulation. We chosen a manipulated sample consisted of 44 stocks which was penalized by security regulation authorities for manipulation and 30 stocks whose price declining 10% or more in at least 3 successive trading days which may be caused by the manipulator’s running-out-of-fund. We documented that the manipulated stocks have significantly higher shares per account, concentration ratio, tradable shares ratio, turnover ratio, and significantly lower number of tradable shares related to non-manipulated ones, manipulated stocks in Shanghai Security Exchange have significantly higher level of larger shareholder’s percentage, but in Shenzhen Security Exchange we found the reversal. Our empirical findings suggest that we can use such variables as proxies to measure the possible stock price manipulation in Chinese stock market. Furthermore, our empirical research about the relationship between the characteristics of manipulated stocks and the stock price movement revealed that the sub-sample with higher shares per account or concentration ratio prior to the price reached its maximum also have higher level of return, averaged annual return and averaged annual abnormal return, and after the price reached it’s maximum, shares per account and concentration ratio decline significantly

Many articles agreed that it is possible for speculators to manipulate stock prices. In this article, we give a dynamic model to show in detail how one type of the trade-based manipulation is realized in stock markets, especially in emerging stock markets, where manipulators have dominative information and fund over the uninformed investors. In our model, we assume that uniformed investors predict future price movement with their forecasting model, the number of uniformed investors who decide to buy stocks increases with fitting degree of the forecasting model for past price data and the model parameters. With these assumptions, manipulators take two-step strategy (pumping the price and selling stocks at higher prices), the pumping step aims to absorb uninformed investors' following by buying the stock by use of the forecasting model, and the selling step is to sell all the stock in higher prices by trying their best to control the supplies and continually attracting the uniformed investors’ following. We show that manipulators can realize their strategies and maximize their final wealth by controlling the strength of pumping and deciding the time length to sell out the stocks. Two numerical examples are also given.