Study On Overreaction Of Stock Market Based On Overconfidence

Efficient market hypothesis contend that each investor in stock market can getinformation promptly and make a rational response at the same time so that the prices ofsecurities can completely reflect all information in market. However, DeBondt and Thaler's(1985) empirical research about American stock markets proved that overreactionphenomenon does exist. The results of their study become a powerful challenge to EMH.Through the analysis of previous studies, we can find that early results about Chinesemarket are lack of stability because the amount of sample is too little and the study time spanis not long enough.It's also the reason that the empirical results is divergent.Currently,domestic studies about overreaction mostly stay in empirical stage about whetherour stock market exists overreaction phenomenon.thorough analysis on the reason ofoverreaction is rare.This article make a empirical research about overreaction phenomenon in Shanghai andShenzhen exchanges of China's a-shares base on DeBondt and Thale's empirical methods. Wedraws the following conclusions: Significant overreaction phenomenon exists both inshenzhen and Shanghai a-share market.Take the momentum strategy and contrarian strategycan both get significant premium profits theoretically.In addition,this article attempt to study the reason of overreaction from the view ofoverconfidence based on prospect theory and DHS model.We make a conclusion thatinvestors's overconfidence level has a positive correlation with stock return.Based on thisconclusion,we make a further study to build a model about Stock portfolio returns andturnover rate.We find that the change of turnover rate and the change of returns has significantpositive correlation. The results coincide with the overconfidence model.Domestic studies about overreaction mostly stay in empirical stage. Thorough analysison the reason of overreaction is rare.This article filled the blank in this aspect.Furthermore,this article made same improvements on DeBondt and Thale's approach. Theseimprovements may provide inspiration for later researchers.