Empirical Study On Overreaction Of Stock Maket In China

According to the Efficient Market Hypothesis,investors can quickly understand all publicly available information, and thus stocks are rationally priced to reflect them. But,a lot of empirical studies have shown the existence of the stock market overreaction phenomenon. Overreaction is a challenge of the Efficient Market Hypothesis.This paper has five parts:Fistly,the study on background and significance. We reviewe the study on overreaction and illuminate the necessary of overreaction research ,then introduce the frame and methods.Secondly, reviewing the literatures at home and abroad.We reviewe the study on overreaction at home and abroad.Thirdly,the empirical analysis of overreaction. Based on the approach of De Bondt&Thaler(1985) and performance of the stocks in the Shanghai stock market,We select the data from January 1997 to June 2008 in Shanghai A-share market and has a empirical study on the overreaction phenomena. The empirical evidence shows that when the formation period and the length of the testing period of 24 months and 36 months, the average cumulative abnormal return of loser portfolio is higher than the winner portfolio 11.99% and 8.53% at the testing period. And, at the testing period,the abnormal returns reverse in both loser and winner portfolio. With the longer period, the abnormal returns reverse more strangely. when the formation period and the length of the testing period of 6 months and 12 months, the returns in both of winners and losers portfolio don't reverse, but there is a continuation of return in the same direction.Fourthly,the explanation of overreaction phenomena.The empirical evidence shows the existence of overreaction on the stock market in China at long-term period.We explain the phenomenon of overreaction on the stock market in this part. Using Fama-French three-factor model to explain the overreaction, The empirical result shows that the market risk factors, company size and book-to-market of equity of these three factors on the stock market overreaction to a certain extent can explain the overreaction, but it can not fully explain the overreaction. Then, from the financial perspective, we use DHS models to explains the phenomenon of overreaction as a supplementary of overreaction.Fifth,the summary and the further research and prospect of overreaction.