Anomalies In Shanghai Stock Market

The efficiency of securities market has always been a hot topic of financial economics. This involves whether asset prices could reflect all information available or the investors are rational or not, and therefore, whether the securities market is efficient in the distribution of the social resources or to what extent the efficiency is. For a long period, the modern financial theory based on efficient market hypothesis and random walk has been the mainstream of financial fields. However, in the past twenty years, a lot of empirical research has contradicted with this theory. Many financial anomalies like overreaction, underreaction, size effect, seasonal effect, week effect and so on have been found. Among them, overreaction is especially important because it may influence the decision-making process of investors and the market efficiency. Now, it has been regarded by traditional and behavior financial researchers as one of the main study fields.This thesis so looks at the anomalies study of financial market and investigates the overreaction problem of Shanghai Stock Exchange. The analysis proved that overreaction does exist in the Chinese stock market. This work then studies the causes for such existence.This research gives a systematic review of anomalies of financial markets. It compares two explanations of overreaction by traditional finance and behavior finance, and introduces basic methods of overreaction study. At the same time, this article studies the overreaction of Shanghai Stock Exchange using the CARs model, Buy-and-Hold model, CAPM, three factors model and Characteristic model. The results show that overreaction does exist in Shanghai stock market, and it is especially strong in the period of 36-54 month. This kind of overreaction could not be explained by market risk premium or company structure (the book-market ratio and the size), but the company structure could provide a better explanation for abnormal returns of the portfolio, which consists with the prediction of behavioral finance. At last, this article discusses the causes of overreaction in the psychology respect. Psychology questionnaire is designed and distributed. Hot hand effect and conservation mood are found when investors facing uncertain choices.