Short-Term Reversal Effect in the Chinese Stock Market:Evidence from Residual Returns
The"fundamentals"that determine expected stock returns consist of three components:The expected return component that is rationally compensated for systemic risk,the cash flow news generated by changing expectations of future cash flows,and the discount rate news generated by changing expectations of rational future discount rates.Of these,cash flow news that are not driven by fundamentals are the component most likely to reverse in the short term.In this paper,for the first time,we use analyst forecast revisions to measure cash flow news and construct a short-term reversal strategy based on residual returns to study the short-term rever-sal effect in the Chinese Stock Market.The empirical results find that the strategy generates higher risk-factor-adjusted returns compared to the standard reversal strat-egy.Further,the methodological test based on isolating cash flow news finds that liquidity shocks rather than investor sentiment can explain the short-term return re-versal phenomenon in the Chinese Stock Market from both the long and short leg of the portfolio.This paper examines the short-term reversal strategy of A-shares from a new perspective of residual returns,which not only enriches the research in the area of financial anomalies in asset pricing,but also provides international evidence on understanding the theory of short-term return reversal in emerging markets,with China as an example.
NETL
NSTL
万方数据
