Market Efficiency and overreaction in the Hong Kong stock market: can a contrarian trading strategy beat the market?

Abstract

This paper examines the overreaction hypothesis on the Hong Kong Stock Exchange from 25 March 1996 to 30 June 1998. The study period encompasses the pre- and post-Asian financial crisis. Consistent with prior studies, we find evidence of overreaction on the Hong Kong market prior to the Asian Financial Crisis. In addition, the overreaction phenomenon is found to be more pronounced for the winners than for the losers Contrary to Zarowin (1990), we find evidence of overreaction primarily for the large firms While we document evidence of overreaction in pre-crisis period, the abnormal profits obtainable from exploiting such phenomenon are economically insignificant after taking into account transaction costs. Thus the Hong Kong stock market is efficient in the weak-form. The results are robust and do not seem to be affected by other confounding factors such as the bid-ask bounce, the size effect, and the day-of-the-week effect.