Shanghai Stock Market "overreaction" Of Empirical And Theoretical Explanation

Efficient Market Hypothesis (EMH) suggests that in an efficient market, stock price reflect all the acquired information. Obviously, EMH implies that investor is rational. Under this assumption, the price of the stock always reflects all the relevant information. So theoretically, there is not any "over-reaction" or "under-reaction" for the stock price. Actually most of the finance investment theories are based on the EMH. However empirical study in the developed financial market shows that there are "over-reaction" or "under-reaction" in the financial market. And EMH cannot explain these kinds of phenomena. Research in behavioral finance suggests that investors in stock market have many cognitive biases, thus tend to overreact to recent information. So, are there any "over-reaction" or "under-reaction" phenomena in China stock market? If the answer is positive, can we use the behavioral finance theory to explain the problem in China stock market? This paper attempts to study the "over-reaction" in China stock market from the empirical angle, and explain it theoretically. Firstly, the theory of the "over-reaction" and "under-reaction" is recalled and considered from the traditional academic study. Research in behavioral finance mainly explains the "over-reaction" phenomena form the psychological evidence, such as optimism, the representativeness heuristic, the cognitive biases. Although domestic academic study had some research in this field, they had different conclusion about this problem in China. And the most important things is that they can not make a convictive and deep explanation about the "over-reaction" phenomena in China stock market. Based on the approach of De Bondt,Thaler(1985)and Zarowin(1989) and performance of the stocks in the Shanghai stock market, this paper have a empirical study on the phenomena. The empirical evidence shows that in the short term around 12 months, the market presents an overreact effect. Compare this effect with the "over-reaction" in American stock market, we find that the extent of overreaction in China is much bigger than that in USA. The China stock market is not a efficient market. Finally, explain the "over-reaction" phenomena in China stock market with the combination of investor sentiment model and the premise of institutional background, the market structure.