Are markets efficient? Evidences from stock markets in United States of America and Hong Kong (China)

In the first part of thesis, we investigated the influence and explanatory power of aggregate insider trading activities on momentum trading strategies in US stock markets. We find that aggregate insider trading activities have ability in predicting cross-sectional returns and can strengthen the naive momentum effects. The risk factors such as size and book-to-market ratio cannot explain the strong momentum effects in our refined momentum strategies. We further extend the time horizon to as long as 3 years and find that the reversal patterns. We interpret our findings as follows: The continuous overreaction causes the mediate term (3- to 12 months) momentum effects and overly pricing. In long-term horizon, these overly priced stocks will be corrected with the time passing. The correction of overly pricing causes long-term reversals.; In the second part of the thesis, we studied relationships between the efficiency of external market and the capital allocation processes in internal market by investigating the performance of red chips traded in Hong Kong. Because of its special role between China and international capital market, it is difficult for international investors to monitor how red chips allocated their Hong Kong raised capital in China. The evidences show that red chips made poor investments in the past decades. However, the external market failed to reflect the unprofitable investment made by the management groups in the internal market. At least, our evidences show that the red chips made diversified but unprofitable investments in aggregate level in the past decade.