The Shanghai Stock Market Reversal Effect Of Inspection And Thinking

Whether the financial market is efficient has always been a hot topic. It is concerned with whether the prices of financial assets can reflect the information unbiased or whether the investors are rational, etc. In the past 20 years, more and more empirical evidence has shown violation with modern financial theory. Researchers have found that it is difficult to explain these anomalies by modern financial theories and models. One of them is overreaction (contrarian effect). It not only has influence on investors' decision-making behavior, but also has something to do with the efficiency of the financial market. Therefore, researchers take it as one of the main research fields.Firstly, this research makes a review of studies on contrarian effect in financial markets in the world as well as the classical methodology of study in this filed. Meanwhile, it gives a review of the criticism on the studying methodology, and compares Cumulative Abnormal Return (CAR) method and Buy-and-Hold (BH) method in detail. Because the method itself could cause bias in estimate results, this paper then use both CAR method and BH method to examine whether there is contrarian effect in Shanghai stock market from 1995 to 2007, making a comparison of the results also. Secondly, this paper examines the estimate result when changing the number of stock in winner/loser portfolio or changing the ending calendar month of formation periods, still by using BH method. Thirdly, it studies the influence on result if the samples in 2007 are eliminated. At last, this paper examines the profit/loss of contrarian strategy in some specified subinterval.In conclusion, the contrarian effect in Shanghai stock market is not as significant as the results reported by previous research, which should be caused by estimate method applied before. At the same time, variation of ending month of formation periods has certain effect on estimate results. It probably can not guarantee abnormal profit to use contrarian strategy in Shanghai stock market.