A study of market efficiency : contrarian evidence in Hong Kong

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A study of market efficiency : contrarian evidence in Hong Kong

 

Author: Leung, Wing-tong
Title: A study of market efficiency : contrarian evidence in Hong Kong
Degree: M.Phil.
Year: 1998
Subject: Stock exchanges -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department: Dept. of Accountancy
Pages: xi, 112 p. : ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1425868
URI: http://theses.lib.polyu.edu.hk/handle/200/1585
Abstract: By using monthly return data of all the common stocks listed on the Hong Kong Stock Exchange for the period from 1 January 1980 to 31 December, 1995, it examines the success of a contrarian strategy of buying prior losers and selling prior winners in making abnormal profits in the Hong Kong stock market. The evidence shows that prior losers outperform prior winners by up to 68.59% in the subsequent five-year test period. This finding is consistent with the result documented by Debondt and Thaler (1985) for the US market. Thus, both U.S. and Hong Kong investors tend to react to new information over-optimistically and over-pessimistically, which causes stock prices to take temporary swing away from their intrinsic values and then reverse back subsequently. This study also investigates the seasonal pattern of returns of an arbitrage portfolio. During the test period, the average return of such a portfolio from February to December is higher than that in January, indicating that the overreaction effect of the Hong Kong stock market is not part of the January effect. This finding is different from the phenomenon documented by Debondt and Thaler (1987). Further tests are conducted using the capital asset pricing model (CAPM) to segregate the total return of the arbitrage portfolio into Jensen 's alpha and systematic change in risk. The evidence shows that the changes in betas of the winners and losers in the Hong Kong stock market are minor. Changes in systematic risk alone cannot explain the price reversal occurring in the test period. Apparently, the overreaction effect in the Hong Kong stock market is due to market mispricing rather than changes in CAPM betas as documented by K.C. Chan (1988) and Ball and Kothari (1989) for the U.S. stock market.

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