Return reversal effect in Shanghai A share market

Abstract

Purpose The existing literature about return reversal effect in Chinese stock markets is inconclusive and controversial. Therefore, the purpose of this paper is to investigate the presence of return reversal effect in the Shanghai A stock market. Design/methodology/approach The authors used the late-stage contrarian strategy of Malin and Bornholt (2013) for the period March 2011‒March 2016. Findings The results show that there is a long-term return reversal effect in the Shanghai A stock market for the period March 2011‒March 2016. When portfolios are in the formation period (P=24 months), the excess returns are significant in the holding period, Q=6, 9, 12, 24 months. Further, there is also a significant short-term momentum effect in the Shanghai A stock market. For the robustness check, a new reversal factor was introduced into the Fama‒French three-factor model. Results show that portfolios have a smaller size and have lower book-to-market ratios; the return reversal factor explains a portion of the abnormal returns and coefficient of the reversal effect is significant. Research limitations/implications The authors caution readers from generalizing the findings of this study, as the sample is small and the focus is only on A stocks listed on the Shanghai Stock Exchange. Originality/value The present research expands the current literature by providing a comprehensive information about the presence of the long-term and short-term return reversal effects in Shanghai A stock market. Furthermore, the Chinese stock markets have distinctive features in comparison to the developed stock markets in terms of government control, institutional structure, liquidity, cultural background, etc. Such differences affect the pattern in stock returns compared with those observed in developed stock markets. Contrary to previous studies, the present study also accounts for robustness checks. Finally, it also evaluates the possible reasons for the return reversal effect in the Shanghai market.

Overreaction effect: evidence from an emerging market (Shanghai stock market)

“…They support the rational behaviour of investor and also suggested that longmaturity options investors tend to "overreact" to changes in the implied volatility of shortmaturity options. Using the late-stage contrarian strategy of Malin and Bornholt (2013) and Reddy et al (2019) in their study, find a long-term return reversal effect and a significant short-term momentum effect in the Shanghai A-stock market stocks. Further, they have documented portfolios having small size and lower book to market values explain a large portion of return reversal effect.…”

“…Shumway and Wu (2006) document disposition effect as a driving factor of momentum effect in the Chinese stock market. Reddy et al (2019) examined return reversal effect in the Shanghai A-share market. With the application of late-stage contrarian strategy of Malin and Bornholt (2013) for the period March 2011-2016, they demonstrate the presence of long-term reversal effect in the Shanghai A-share market.…”

On Stock Return Patterns Following Large Monthly Price Movements: Empirical Evidence From India

“…Vo and Troung (2017) studied winner and loser portfolios in the Vietnamese market and evidenced significant momentum. Reddy et al (2019) examined the reversal phenomenon in the Shanghai A stock market and evidenced short-term continuations and long-term reversals.…”

The Impact of Business Cycles, Stock Market Phases and Crisis on the Value Premium: The Indian Experience

“…However, without testing the robustness for the emerging markets, it is hard to agree with the above notion's universality. The emerging markets have less developed stock markets which have low liquidity and less industrialisation and higher transaction costs with high growth potential and more open for economic liberalisation (Bekaert, Harvey and Lundblad, 2007).Also, differential behaviours of stakeholders in the emerging markets require diverse measures to deal with market information (Reddy, Qamar and Rao, 2019).The motivation of the study lies in the seminal work of contrarian investing (Lakonishok, Shleifer and Vishny, 1994). In this paper, the authors argued "value stocks would be fundamentally riskier than glamour stocks if, firstly, they underperformed glamour stocks in some states of the world, and secondly, these are on an average in "bad" states, in which the marginal utility of wealth is high, making value stocks unattractive to risk-averse investors."…”