Empirical Analysis Of Overreaction In Chinese Stock Market

The efficient market hypothesis (EMH) has been the base of traditional financialtheory and made a great contribution to the capital asset pricing theory. Aftertwentieth Century80years, with the development of empirical studies, a large numberof financial anomalies appeared in the stock market. Overreaction is one of the typicalfinancial anomalies which the efficient market hypothesis cannot explain. With theproposal of the theory of behavioral finance, overreaction becomes one of itsimportant research directions.Foreign scholars studied the overreaction earlier, so they have reached aconsensus that overreaction dose exist in the stock market.While domestic scholarshave began to study overreaction since1998, because of the short sample period、small sample size and different method, domestic scholars hold different views on thestock market overreaction. So it is necessary to do further research on our stockmarket overreaction.This research takes the Shanghai stock market and Shenzhen stock market asresearch individual respectively, with all the A stocks as the object of study, analyzingthe stock monthly closing price data in1995December to2013December with Rlanguage software. The combination of theoretical and empirical methods is used toanalyze the stock market overreaction. First of all, this paper gives a review of thestudies on overreaction at home and abroad, and the theoretical explanation ofoverreaction from the perspective of behavioral finance and traditional finance.Market adjusted cumulative abnormal return model CARs is used to verify whetherthere have been overreaction in the Shanghai and Shenzhen stock market for a longtime. The empirical analysis shows that overreaction phenomenon has existed in theShanghai and Shenzhen stock market for a long time, and the degree of overreactionin Shenzhen stock market is stronger than Shanghai stock market.The empirical results show that there is overreaction in our stock market, soCAPM model and Fama-French three factors model are used to do further analysis onoverreaction cause. Based on the CAPM model, this article gets the followingconclusions, the market risk factor is not the cause of overreaction, market system riskis negatively correlated with the rate of return. That is, whether the market up or down,the return of loser portfolio is not only higher than the winner portfolio in the tested period, but also its risk is less than the risk of winner portfolio; Scale factor is thereason of overreaction, when controlling the scale of portfolios, return gap betweenthe loser portfolio and winner portfolio is no longer significant; calendar effects is notthe reason of overreaction. Based on the Fama-French three factor model and the newthree factor model(turnover rate factor replaces book to market ratio factor),the resultsshow that the return of the arbitrage portfolio can be explained by the Fama-Frenchthree factor model and the new three factor model. What is more, the Shanghai stockmarket is more vulnerable to the book to market ratio factor than Shenzhen stockmarket, while the Shenzhen stock market is more vulnerable to the scale factor andthe turnover rate factor than Shanghai stock market.At last, suggestions on investment strategies、market system construction andinvestor education are put forward in this paper, hoping that these measures canreduce overreaction and help more investors achieve return on investment.