Narrow Results

In this chapter, I sketch the picture emerging from two studies of mine dealing with psychological aspects of immediate and longer-term stock price reactions to analyst recommendation revisions. These studies demonstrate that: (i) if on the day of a recommendation upgrade (downgrade), the respective stock’s abnormal return is negative (positive), then the stock’s cumulative abnormal returns for the period of up to half a year following the recommendation upgrade (downgrade) tend to be higher (lower), and (ii) cumulative abnormal stock returns during half a year following analyst recommendation upgrades (downgrades) tend to be higher (lower) if the latter are published before holidays. I attribute these findings to the effects of investor inattention to news and mood, respectively.

The holiday effect is one form of the calendar effect, which means the abnormal return or abnormal volatility of the stock market before and after the holiday. The holiday effect can be explained by the behavioral finance perspective. Investors could adopt an active investment strategy to take advantage of the holiday effect and achieve excess returns. This paper examines the holiday effect on the Chinese stock markets of Shanghai and Shenzhen between January 2008 and August 2022. GARCH-Mand EGARCH-M models are used to observe the existence of holiday effects in the mainland Chinese market before and after the Chinese New Year and National Day.

The results suggest that a significantly positive Chinese New Year effect exists for 2 days before, 3 days before, and 2 days after the Chinese New Year in the Shanghai market. There is no or very few holiday effect in the Shenzhen market. The positive National Day holiday effect exists 1 day before, 1 day after, and 2 days after the holiday. Besides, the results show that 1 day after the holiday is more volatile than other days around the holiday in Shanghai and Shenzhen stock markets. In addition, the study found evidence of the mainland China market reacting asymmetrically to positive and negative news.