The Empirical Research About Whether There Is Overreaction In Chinese Stock Market

Recently, behavior finance attracts more and more attention.Overreaction is one of the hot issues. More and more empirical results and theories have been achived.But,the relevant study in China which based on local data is still lack. According to the method of Debondt and Thaler's classical theories, using the data of the Chinese stock market in Wind Database,this paper tests whether the Chinese stock market overreacts. This paper suggests the result that : in China stock market, there is a significant overreaction in long term,and in short term there is a significant underreaction. It might be caused by the investor intrinsic psychological momentum and inverstment inclination ,but not the risk difference.The summary makes a systematical review of existent domestic and foreign theories relevant with overreaction: pre-period return theory, risk theory, size theory, bid-ask theory and the theory of overreaction to earning information. Furthermore, it also introduces the contrarian strategy based on overreaction theory . First, the paper sorts all the stocks according to the past accumulated abnormal return (CER).The winner is who performed best while the loser is who performed worst. By reviewing the accumulated average abnormal return (CAR) changing tendency in both the winner and the loser during testing period, the paper finds that: it has a better performance on loser than winner in a long term, but it is not in a short term. The empirical results supports the overreaction hypothesis in a long term, and the underreaction hypothesis in a short term.Based on above empirical results, this paper continue to discuss the case that during a whole period of Chinese stock market. And we can find the same results which supports the overreaction hypothesis in a long term, and the underreaction hypothesis in a short term. Ulteriorly,we discuss the empirical result in different domain, and find that there is no more different during the domains, but the Industry domain is more clear on CAR trend.In conclusion,with the capital market being more and more mature, there will be more new or more rational empirical results.