Date of this Version

10-4-2016

Document Type

Working Paper

Abstract

This paper applies the threshold quantile autoregressive model to study stock return autocorrelations and predictability in the Chinese stock market from 2005 to 2014. The results show that the Shanghai A-share stock index has significant negative autocorrelations in the lower regime and has significant positive autocorrelations in the higher regime. It attributes that Chinese investors overreact and underreact in two different states. These results are similar when we employ individual stocks. Besides, we investigate stock return autocorrelations by different stock characteristics, including liquidity, volatility, market to book ratio and investor sentiment. The results show autocorrelations are significantly large in the middle and higher regimes of market to book ratio and volatility. Psychological biases can result into return autocorrelations by using investor sentiment proxy since autocorrelations are significantly larger in the middle and higher regime of investor sentiment. The empirical results show that predictability exists in the Chinese stock market.

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