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Why the Dogs of the Dow Bark Loudly in China

Author

Listed:
  • Carol Wang
  • James E. Larsen
  • Fall M. Ainina
  • Marlena L. Akhbari
  • Nicolas Gressis

Abstract

Problem statement: The Dogs of the Dow (Dow Dogs) strategy, which has gained widespread popularity in the U.S., is found to be considerably successful in China’s stock markets. This trading strategy contradicts the well-established efficient market hypothesis. Approach: This study examines the cross-sectional variations in the magnitude of the predictive power of the Dow Dogs strategy using Chinese stocks for 1994-2009. Results: Our results suggest that (1) Significant Dow Dogs effect apply to Class A shares, but not Class B shares; (2) Stocks priced between $1 and $5 demonstrate the strongest Dogs effect among all stock price ranges; (3) Changes in share price range has the most powerful impact on risk adjusted return, followed by changes in the AB share class, rebalancing frequency and number of Dogs in the portfolio. Conclusion: Our results suggest that the superior predictive power of the Dow Dogs strategy is mainly driven by behavioral factors. Our overall findings support the behavioral hypothesis in which market inefficiency stems from investors irrationality and herding behaviors. This study provides practical implications to both government regulators and finance practitioners. JEL Classification: G14, G15.

Suggested Citation

  • Carol Wang & James E. Larsen & Fall M. Ainina & Marlena L. Akhbari & Nicolas Gressis, 2011. "Why the Dogs of the Dow Bark Loudly in China," American Journal of Economics and Business Administration, Science Publications, vol. 3(3), pages 560-568, November.
    • Handle: RePEc:abk:jajeba:ajebasp.2011.560.568
    DOI: 10.3844/ajebasp.2011.560.568
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    References listed on IDEAS

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    Cited by:

    1. Ekaterina Dubova & Sergey Volodin & Irina Borenko, 2018. "High-Dividend Portfolios with Filters on the Financial Performance and an Optimization of Assets Weights in a Portfolio," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 65(3), pages 347-363, September.

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    More about this item

    Keywords

    Dogs of the Dow; China stock market; market efficiency; Dow Jones Industrial Average (DJIA); capital markets; foreign investors; herding behaviors; market economy; Shenzhen Stock Exchange (SZSE); State-Owned Enterprises (SOEs);
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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