Coreversal: The booms and busts of arbitrage activities in China

Xin Liu, Zhigang Qiu, Luyao Shen and Weinan Zheng

Journal of Empirical Finance, 2023, vol. 71, issue C, 51-65

Abstract: We investigate time-varying reversal arbitrage in China’s stock market and subsequent reversal trading profits. We construct a measure of reversal arbitrage intensity, coreversal, which captures the abnormal return correlation among stocks on which reversal strategies speculate. In times of low reversal arbitrage, the reversal strategy exhibits delayed correction, taking up to three years for abnormal returns to be realized. In times of high reversal arbitrage, reversal profits get realized quickly but stock prices get over-corrected in the long-run. These effects are stronger for stocks with low limits-to-arbitrage conditions. Our results suggest that strong arbitrage can generate excess price fluctuations.

Keywords: Coreversal; Arbitrage activities; Mispricing; Reversal; Sophisticated investors (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G23 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:71:y:2023:i:c:p:51-65

DOI: 10.1016/j.jempfin.2023.01.001

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