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Investors' reactions to sharp price changes: Evidence from equity markets of the People's Republic of China

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  • Rezvanian, Rasoul
  • Turk, Rima A.
  • Mehdian, Seyed M.

Abstract

We examine investors' reactions to extreme price changes in Chinese equity markets to uncover patterns of price formation. We compare the price behavior and volatility of "A" and "B" shares in both the Shanghai and Shenzhen markets within a 30-day window following the arrival of new information to the market. We find that the arrival of unexpected news resulting in sharp price changes significantly increases market volatility in China and that the subsequent price adjustments exhibit upward corrective patterns. Contrary to findings for other markets, these results are consistent with the prediction of the Uncertain Information Hypothesis. In reaction to both favorable and unfavorable information, investors in Chinese equity markets initially set equity prices below their fundamental values and subsequent price trends register an upward adjustment. These findings suggest that investors in Chinese stock markets react rationally to the arrival of unexpected information and that no contrarian strategy can be utilized to generate abnormal return.

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  • Rezvanian, Rasoul & Turk, Rima A. & Mehdian, Seyed M., 2011. "Investors' reactions to sharp price changes: Evidence from equity markets of the People's Republic of China," Global Finance Journal, Elsevier, vol. 22(1), pages 1-18.
    • Handle: RePEc:eee:glofin:v:22:y:2011:i:1:p:1-18
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    Cited by:

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    3. Lili Li & Shan Leng & Jun Yang & Mei Yu, 2016. "Stock Market Autoregressive Dynamics: A Multinational Comparative Study with Quantile Regression," Mathematical Problems in Engineering, Hindawi, vol. 2016, pages 1-15, September.
    4. Baotai Wang & D. Ajit, 2013. "Stock Market and Economic Growth in China," EcoMod2013 5649, EcoMod.
    5. Rezvanian Rasoul & Klaczynska Ewelina & Krysiak Zbigniew, 2015. "Equity Market Reaction to Sharp Price Changes: Evidence from Poland," Scientific Annals of Economics and Business, Sciendo, vol. 62(2), pages 169-190, July.
    6. Chun-Teck Lye & Tuan-Hock Ng & Kwee-Pheng Lim & Chin-Yee Gan, 2020. "Investor protection and market reaction to unusual market activity replies," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 16(8), pages 2034-2069, July.
    7. Pei, Donglin & Hamill, Philip A., 2013. "Do modified audit opinions for Shanghai listed firms convey heterogeneous information?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 22(1), pages 1-11.
    8. Soner AKKOC & Nasif OZKAN, 2013. "An Empirical Investigation of the Uncertain Information Hypothesis: Evidence From Borsa Istanbul," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 7(2), pages 101-119.

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