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Investors' reactions to sharp price changes: Evidence from equity markets of the People's Republic of China

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  • Rezvanian, Rasoul
  • Turk, Rima A.
  • Mehdian, Seyed M.
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    Abstract

    We examine investors' reactions to extreme price changes in Chinese equity markets to uncover patterns of price formation. We compare the price behavior and volatility of "A" and "B" shares in both the Shanghai and Shenzhen markets within a 30-day window following the arrival of new information to the market. We find that the arrival of unexpected news resulting in sharp price changes significantly increases market volatility in China and that the subsequent price adjustments exhibit upward corrective patterns. Contrary to findings for other markets, these results are consistent with the prediction of the Uncertain Information Hypothesis. In reaction to both favorable and unfavorable information, investors in Chinese equity markets initially set equity prices below their fundamental values and subsequent price trends register an upward adjustment. These findings suggest that investors in Chinese stock markets react rationally to the arrival of unexpected information and that no contrarian strategy can be utilized to generate abnormal return.

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    Bibliographic Info

    Article provided by Elsevier in its journal Global Finance Journal.

    Volume (Year): 22 (2011)
    Issue (Month): 1 ()
    Pages: 1-18

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    Handle: RePEc:eee:glofin:v:22:y:2011:i:1:p:1-18

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    Web page: http://www.elsevier.com/locate/inca/620162

    Related research

    Keywords: Chinese equity markets Over and under reaction Market efficiency;

    References

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    Cited by:
    1. Soner AKKOC & Nasif OZKAN, 2013. "An Empirical Investigation of the Uncertain Information Hypothesis: Evidence From Borsa Istanbul," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 7(2), pages 101-119.
    2. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    3. Baotai Wang & D. Ajit, 2013. "Stock Market and Economic Growth in China," Economics Bulletin, AccessEcon, vol. 33(1), pages 95-103.

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