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.
Highlights
Since the mid-1980s, behavioral finance has rapidly risen and become an entire theory system
A number of empirical studies reported that stock returns show significant autocorrelation
Behavioral finance attributes the significant autocorrelation of stock returns to the biased reaction of investors to new information, including overreaction and underreaction
Summary
Since the mid-1980s, behavioral finance has rapidly risen and become an entire theory system. Behavioral finance attributes the significant autocorrelation of stock returns to the biased reaction of investors to new information, including overreaction and underreaction. When mispricing is corrected after a period of time, the accumulated returns of losers would be greater than that of winners.In this paper, an ANAR-TGARCH model is adopted to test overreaction or underreaction in the Chinese stock market. Coefficient estimates are shown, where “*” represents the significant level of .1, “**” represents the significant level of .05, and “***” represents the significant level of .01 (the same below) Both the means and volatilities of daily returns of the Shanghai Composite Index present a significant asymmetric pattern. The Wald test results, which are not listed, illustrate that the intensity of first-order autocorrelation of return has nothing to do with the conditional run length. When the conditional return is normally positive, the first-order positive autocorrelation is significant, but when the conditional return is abnormally positive, the first-order positive autocorrelation is insignificant
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