Price overreaction to up-limit events and revised momentum strategies in the Chinese stock market

Chenye Liu, Ying Wu and Dongming Zhu

Economic Modelling, 2022, vol. 114, issue C

Abstract: Existing studies have found no significant medium-term momentum effects in the Chinese stock market. We find that investors overreact to up-limit events, and price overreaction to up-limit events leads to the disappearance of the momentum effect in China. Thus, we propose a revised momentum measure defined as the sum of daily log-returns in the estimation period, excluding trading days involving up-limit events, and document significant and robust revised medium-term momentum effects in China. We also document several seasonal patterns of the revised momentum effects and discuss possible explanations, which differ from those found in developed markets. We construct the revised momentum factor and show that typical factor models cannot explain its existence. Our study provides evidence that the medium-term momentum effect remains a significant and robust anomaly in the Chinese stock market, where investors are more likely subject to behavioral biases.

Keywords: Revised momentum strategies; Price overreaction; Up-limit events; Seasonal effects; Chinese stock market (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001560

DOI: 10.1016/j.econmod.2022.105910

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