Information Diffusion and Overreaction: Evidence from the Chinese Stock Market

Changyun Wang and Lei Xie

Emerging Markets Finance and Trade, 2010, vol. 46, issue 2, 80-100

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.

Keywords: Chinese stock market; contrarian strategy; information diffusion; overreaction (search for similar items in EconPapers)
Date: 2010
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