The Behavior Finance Explanation Of Overreaction And Underreaction In Chinese Stock Market

Joining with the fruits of experimental psychology about personal judgment, behavior finance has constructed some investors'psychological models, and has successfully unclosed overreaction and underreaction, which depart from Efficient Market Hypothesis. However, as for Chinese stock market, which has been established for only short term and is remarkable of exceptional market institution and social circumstances, which are different from mature market, these models aren't suitable. Under these special conditions, the investors'psychological model must refer to the distinctive psychological biases on Chinese stock market.With theoretical analysis and experience research, this paper finds that under the special environment, investors are not only endowed with psychological biases such as overconfidence, which is same as mature market, but endowed with distinctive psychological biases such as speculating mentality. Under the dominating of speculating mentality, institutional investors have the preference of market manipulation, and personal investors show the tendency of following momentum and disposition effect. Based on these researches, this paper takes HS model as frame and improves it with the condition of speculating mentality. According to the tradition of stock market, and from a bull-period and a bear-period, the model analyzes the reason respectively, which makes main contribution to overreaction and underreaction, and argues that it is the mutual effect of institutional investors with personal investors under speculating mentality. The model provides a reasonable explanation to overreaction and underreaction on Chinese stock market, which is different from mature market and remarkable of obvious overreaction and unapparent underreaction.However, all present researches are under the environment of imperfect institution on Chinese stock market, the improved model is also conditioned on the exceptional market institution and social circumstances. As the further reforming and the gradual perfecting of institution on Chinese stock market, it is necessary to make a new investigation on overreaction and underreaction and improve the investors'psychological models with new conditions.