Are Chinese Investors Irrational:an Empirical Analysis And Comparative Study On The Mean Reversion Speed Between Chinese And The U.S. Stock Markets

Abstract:Turnover rate is an index commonly used to measure how many times on average every unit of capital is traded in a stock market over a certain period of time. Turnover rates of Chinese stock markets are much higher than that of those markets in developed countries and areas, such as U.S., Japan and Hong Kong, which means average investment horizon of each unit of capital is much shorter in China. The paper used a discrete time model to run a linear regression based on daily trading data of both market indexes and sample individual stocks from Shanghai Stock Exchange, Shenzhen Stock Exchange and New York Stock Exchange during 1990-2014. The empirical results showed that China has a higher speed of mean reversion than US. Mean reversion could usually be spotted within 1 year in Chinese stock markets while in US, it usually took more than 1 year but less than 2 years. Thus, for individual investors in China, shorter investment horizon matches the shorter mean reversion cycle and therefore is not "irrational". The paper further discussed about the main reasons that lead to the difference of speed of mean reversion between China and US. Analysis from the perspective of listed companies, trading system and investors showed that higher mean reversion speed in China might result from more severe disposition effect and more widespread gambler’s fallacy found among Chinese investors. To increase the investment return, the paper listed 3 suggestions for Chinese individual investors, including setting bottom line for loss, trading from others’position and establishing investment capabilities.