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Analysis of the overreaction effect in the Chinese stock market

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  • J. Wang
  • B. M. Burton
  • D. M. Power

Abstract

Several recent studies have examined whether the main Chinese stock markets in Shanghai and Shenzhen are weak-form efficient. A consistent feature of the findings is that the pricing of foreign-owned B shares is more predictable than domestically-owned A shares. However, none of the earlier investigations examine the overreaction effect, one of the most commonly-employed tests of weak-form efficiency in developed stock markets. The present study therefore reports the results of such an analysis for a sample of more than 300 Chinese shares over a six-year period beginning in August 1994. In contrast to earlier evidence, the article finds that the overreaction effect is most pronounced in the market for A shares, suggesting that the normal impression of greater efficiency in the pricing of Chinese-owned equities may be open to further challenge and debate.

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  • J. Wang & B. M. Burton & D. M. Power, 2004. "Analysis of the overreaction effect in the Chinese stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 437-442.
    • Handle: RePEc:taf:apeclt:v:11:y:2004:i:7:p:437-442
    DOI: 10.1080/1350485042000248978
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    References listed on IDEAS

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    Cited by:

    1. Rezvanian, Rasoul & Turk, Rima A. & Mehdian, Seyed M., 2011. "Investors' reactions to sharp price changes: Evidence from equity markets of the People's Republic of China," Global Finance Journal, Elsevier, vol. 22(1), pages 1-18.
    2. Asiya Sohail & Attiya Yasmin Javid, 2014. "The Global Financial Crisis and Investors’ Behaviour; Evidence from the Karachi Stock Exchange," PIDE-Working Papers 2014:106, Pakistan Institute of Development Economics.
    3. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2018. "Short-Term Price Overreactions: Identification, Testing, Exploitation," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 913-940, April.
    4. Xu, Lilai & Oh, K.B., 2011. "The stock market in China: An endogenous adjustment process responding to the demands of economic reform and growth," Journal of Asian Economics, Elsevier, vol. 22(1), pages 36-47, February.
    5. Hanwen Chen & Siyi Liu & Xin Liu & Jiani Wang, 2022. "Opportunistic timing of management earnings forecasts during the COVID‐19 crisis in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1495-1533, April.
    6. Hisham Farag & Robert Cressy, 2010. "Do unobservable factors explain the disposition effect in emerging stock markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1173-1183.
    7. Chiang, Thomas C. & Nelling, Edward & Tan, Lin, 2008. "The speed of adjustment to information: Evidence from the Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 216-229.
    8. Borgards, Oliver & Czudaj, Robert L., 2020. "The prevalence of price overreactions in the cryptocurrency market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    9. 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.
    10. Rezvanian Rasoul & Klaczynska Ewelina & Krysiak Zbigniew, 2015. "Equity Market Reaction to Sharp Price Changes: Evidence from Poland," Scientific Annals of Economics and Business, Sciendo, vol. 62(2), pages 169-190, July.
    11. Arquette, Gregory C. & Brown Jr., William O. & Burdekin, Richard C.K., 2008. "US ADR and Hong Kong H-share discounts of Shanghai-listed firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1916-1927, September.
    12. Mark Schaub, 2006. "Investor overreaction to going concern audit opinion announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 16(16), pages 1163-1170.
    13. Hisham Farag, 2015. "Long-term Overreaction, Regulatory Policies and Stock Market Anomalies: Evidence from Egypt," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 112-139, August.

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