| Research in behavioral finance suggests that investors in stock market have many cognitive biases, thus tend to overreact or underreact to unexpected information.We document new patterns in the dynamics between stock returns and trading volume. Based on the weekly data of A shares of Shanghai for the period from 2003 to 2006, this paper examines the short time overreaction and under-reaction effect in stock market of China, with unexpected news released. We construct two portfolios base on the A share which is traded in the market and define unexpected news as unexpected change of turnover and return dispersion of the stock, which we name turnover shock and return dispersion shock separately. Heteroscedasticity and autocorrelation are removed from both of the turnover and return dispersion series, and we get the shocks: MRTO (market-adjusted relative turnover) and MRRD (market-adjusted relative dispersion) series. Then we analyze the momentum and reversal in the portfolio-returns under the shocks.The evidence shows that within the short time, there is overreaction and under-reaction in Shanghai stock market. The reason would be that there are still many problems in our stock market system, and investors are not mature enough in the whole. The extent of overreaction and the speed of the reversal after overreaction is positively correlated to the scale of the A share. The reason would be investors have lost confidence in the market recently and take little attention to the news in the market. This study could provide grounds for the improvement of the stock market in the future.On the basis of the study, we suggest that we should raise the types and levels of the investors and improve their quality. We should pay attention to both the speculation function and the investment function of the market. Establish the pattern which all types of investors compete and complement each other, which could help us to improve the efficiency of the market. |
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