Empirical Study on Overreaction and Underreaction in Chinese Stock Market Based on ANAR-TGARCH Model

Yong Fang

Post-Doctoral Scientific Research Workstation, Shanghai International Group Co., Ltd. (SIG), Shanghai, China;Post-Doctoral Research Station for Applied Economics, Fudan University, Shanghai, China;Department of Applied Mathematics, Shanghai Finance University, Shanghai, China.

DOI: 10.4236/jfrm.2013.24012                

Abstract

An ANAR-TGARCH model is adopted in this paper. By using a first-order asymmetric autoregressive mean equation, we conduct a series of robust tests on overreaction and underreaction in the Chinese stock market by taking the abnormal value, run length, time scale, size, industry, style, and market cycle into account. We then comprehensively compare the intensities of the first-order autocorrelation by using Wald coefficients tests. Results could provide strong empirical support for generating stock market investment strategies.

Keywords

Overreaction; Underreaction; ANAR-TGARCH Model

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision making under risk. Econometrica, 47, 263-291. http://dx.doi.org/10.2307/1914185
[2]	De Bondt, W. F. M., & Thaler, R. H. (1985). Dose the stock market overreact? Journal of Finance, 40, 793-805.
[3]	Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4, 199-214. http://dx.doi.org/10.1287/mksc.4.3.199
[4]	De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990a). Noise trader risk in financial markets. The Journal of Political Economy, 98, 703-738.
[5]	De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990b). Positive feedback investment strategies and destabilizing rational speculation. Journal of Finance, 45, 375-395.
[6]	Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49, 307-343. http://dx.doi.org/10.1016/S0304-405X(98)00027-0
[7]	Daniel, K., Hirshleifer, D., & Subrahmanyam, A. (1998). Investor psychology and investor security market underand overreactions. Journal of Finance, 53, 1839-1886. http://dx.doi.org/10.1111/0022-1082.00077
[8]	Barberis, N., Huang, M., & Santos, T. (2001). Prospect theory and asset prices. Quarterly Journal of Economics, 116, 1-53. http://dx.doi.org/10.1162/003355301556310
[9]	Gervais, S., & Odean, T. (2001). Learning to be overconfident. The Review of Financial Studies, 14, 1-27. http://dx.doi.org/10.1093/rfs/14.1.1
[10]	Bacchetta, P., & Wincoop, E. V. (2008). Higher order expectations in asset pricing. Journal of Money, Credit and Banking, 40, 837-866. http://dx.doi.org/10.1111/j.1538-4616.2008.00139.x