Empirical Study On Overreaction In China’s Stock Market

With the discovering of the stock market abnormal phenomena, Efficient Market Hypothesis which is one of the premises of the classical finance has been challenged. A growing number of financial scholars have begun to focus on investor behavior. In1985De Bondt and Thaler published "Does the Stock market overreact". He pointed that the U.S. stock market overreacted and EMH is not established. This article helped the study of behavioral finance move a big step forward.China’s stock market was established in the early1990s. Now China has become the world’s second largest capital market. Compared with the stock markets in developed countries, China’s stock market has some special characteristics such like excessive administrative intervention, high-speed expansion, high cost IPO and more speculation.In this paper, we concluded and analyzed the characteristic of the relative research. First of all, we empirically analyzed the overreaction phenomenon in China’s stock market with the data during the period of1997-2011. The results showed that in35months test period, China’s stock market exist the overreaction phenomenon which cannot be explained by the change of β in the CAPM framework. We also empirically tested and analyzed the preference of the behavior of investors behind the overreaction phenomenon, and tried to use the behavioral theory to explain. The empirical results showed that prime reason for the overreaction was the "First quarter effect", while the size effect was not sufficient to explain it. And we can use the BSV model to understand the "First quarter effect". This paper proposes to strengthen and improve the market information disclosure mechanism and to promote institutional investors and to strengthen small and medium-sized investor education.