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Information Diffusion and Overreaction: Evidence from the Chinese Stock Market

Author

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  • Changyun Wang
  • Lei Xie

Abstract

This paper empirically examines the relation between overreaction and the speed of information diffusion in the Chinese stock market. Industry-adjusted firm size and residual analyst coverage are used to proxy the speed of information diffusion. We document strong evidence that the profitability of a monthly contrarian strategy decreases with industry-adjusted firm size or residual analyst coverage. Moreover, the profitability of contrarian strategies survives for a longer horizon for stocks with slower information diffusion than for those with faster information diffusion. This result holds true even if risk, bid-ask spread, lead-lag effect, inventory costs, and limits to arbitrage are properly accounted for. Our findings suggest that information environment and information diffusion determine the extent of overreaction.

Suggested Citation

  • Changyun Wang & Lei Xie, 2010. "Information Diffusion and Overreaction: Evidence from the Chinese Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(2), pages 80-100, March.
    • Handle: RePEc:mes:emfitr:v:46:y:2010:i:2:p:80-100
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    Citations

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    Cited by:

    1. Sanjay Rajagopal, 2012. "A Study of the Returns Behavior of Small Capitalization REITs," Journal of Economics and Behavioral Studies, AMH International, vol. 4(8), pages 457-466.
    2. Lin, Hung-Wen & Huang, Jing-Bo & Lin, Kun-Ben & Zhang, Joyce & Chen, Shu-Heng, 2020. "Which is the better fourth factor in China? Reversal or turnover?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    3. Chi Dong & Hooi Hooi Lean & Zamri Ahmad & Wing-Keung Wong, 2019. "The Impact of Market Condition and Policy Change on the Sustainability of Intra-Industry Information Diffusion in China," Sustainability, MDPI, vol. 11(4), pages 1-20, February.
    4. Hung-Wen Lin & Kun-Ben Lin & Jing-Bo Huang & Shu-Heng Chen, 2021. "Timely Loss Recognition Helps Nothing," Sustainability, MDPI, vol. 13(14), pages 1-24, July.
    5. Tsung-Hsun Lu & Yung-Ming Shiu, 2012. "Tests for Two-Day Candlestick Patterns in the Emerging Equity Market of Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 41-57, January.
    6. Muhammad Kashif & Sanyah Saad & Imran Umer Chhapra & Farhan Ahmed, 2018. "An Empirical Evidence of Over Reaction Hypothesis on Karachi Stock Exchange (KSE)," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(4), pages 449-465, April.
    7. Shen, YuJan & Shen, KuanFu, 2022. "Short-term contrarian profits and the disposition effect," Finance Research Letters, Elsevier, vol. 46(PB).

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