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Coreversal: The booms and busts of arbitrage activities in China

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  • Liu, Xin
  • Qiu, Zhigang
  • Shen, Luyao
  • Zheng, Weinan

Abstract

We investigate time-varying reversal arbitrage in China’s stock market and subsequent reversal trading profits. We construct a measure of reversal arbitrage intensity, coreversal, which captures the abnormal return correlation among stocks on which reversal strategies speculate. In times of low reversal arbitrage, the reversal strategy exhibits delayed correction, taking up to three years for abnormal returns to be realized. In times of high reversal arbitrage, reversal profits get realized quickly but stock prices get over-corrected in the long-run. These effects are stronger for stocks with low limits-to-arbitrage conditions. Our results suggest that strong arbitrage can generate excess price fluctuations.

Suggested Citation

  • Liu, Xin & Qiu, Zhigang & Shen, Luyao & Zheng, Weinan, 2023. "Coreversal: The booms and busts of arbitrage activities in China," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 51-65.
    • Handle: RePEc:eee:empfin:v:71:y:2023:i:c:p:51-65
    DOI: 10.1016/j.jempfin.2023.01.001
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    More about this item

    Keywords

    Coreversal; Arbitrage activities; Mispricing; Reversal; Sophisticated investors;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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