Analysis of the overreaction effect in the Chinese stock market

Several recent studies have examined whether the main Chinese stock markets in Shanghai and Shenzhen are weak-form efficient. A consistent feature of the findings is that the pricing of foreign-owned B shares is more predictable than domestically-owned A shares. However, none of the earlier investigations examine the overreaction effect, one of the most commonly-employed tests of weak-form efficiency in developed stock markets. The present study therefore reports the results of such an analysis for a sample of more than 300 Chinese shares over a six-year period beginning in August 1994. In contrast to earlier evidence, the article finds that the overreaction effect is most pronounced in the market for A shares, suggesting that the normal impression of greater efficiency in the pricing of Chinese-owned equities may be open to further challenge and debate.