Lucky Culture Effect In Chinese Gem Market

The efficient market hypothesis EMH says that the stock price can express all existing information. Only when there is some new information, the stock price will change. Investors in capital market can only gain the market premium.Behavioral finance thinks that because of psychological factors, such as limited attention, investors often have cognitive biases. The majority of investors in market are irrational. When they face a large number of stocks and information, they have no more attention to every stock and information. They depend on their own intuition to make investment decision; this irrational behavior can result in the abnormal fluctuation in capital market. Also, the stock name, as one of the most obvious features of the stock, is often used by investors as judgement data. The irrational investors are likely to make an irrational investment decision just by guessing the literal meaning of the stock name, resulting in the abnormal fluctuations of the value of the stock.As a big country with a long history of culture, lucky culture affects the generation after generation. And the lucky words are one of the most important parts of Chinese traditional culture. Would "Lucky Culture" plays a significant role on stock return? We guess that the investors have a special preference for the stocks with lucky words. For example, the investors maybe believe that the stocks with lucky words would have a better performance and relatively high rate of return, just because they seem good. The existing literatures show that the Chinese stock market has the worship of stock name. So based on the above views, we study the stock's name with lucky words in Gem market.Through questionnaires, we get the 23 lucky words and 23 words with low score. According to these words, we choose the stocks with lucky words and stocks with "bad words" from Gem market. There are two time periods to demonstrate, short term and long term. Firstly, we choose the stocks with lucky words whose IPO are during 2009.10 and 2014.12 as the sample stocks. There are 59 lucky stocks and 20 "bad stocks". This step we want to know how is the performance of these "lucky stocks" and "bad stocks" during the first listing day to the 12th month. We use the monthly abnormal Buy-and-Hold return (ABHR) to measure the stock performance, and make the multivariate regression analysis with P/E, turnover rate and circulation market value of stock. It indicates that investors do have lucky culture preference. It shows that the stocks with lucky words have 12% higher abnormal return than the stocks with bad words on the first listing day, and the following first month the lucky stocks still have a better performance. Although investors have a special preference on the "lucky stocks", this preference can't keep long. It can promote the stock price positively just one month after IPO.In long term, we choose the time period from 2012.6 to 2014.12, which market's fluctuation is stable. We want to prove if the investors can make surplus profit from this lucky stock portfolio during this long term. We use Carhart Four-factor Model to test whether it's good to hold the lucky portfolio in long term or not. We also build an arbitrage portfolio, that is, buying the lucky portfolio and selling the bad portfolio. The result shows that investors can't gain excess earnings. It is unwise to hold this lucky portfolio for a long time.According to the above research, we can have conclusions that investors have lucky culture preference, the preference can make the investors have cognitive biases. But the preference can't last long. That is, investors do have blind worship for lucky culture but not long. In long period, investors who hold the lucky portfolio can't get the excess profit. So based on the above conclusions, we have two proposals:one is the strategy in investment; the investors should make the reverse investment in the short term, rather than the traditional way of chasing after going up and killing the drop tend. Anyway the government should remind investors to make rational investment. In addition the government should improve the system of information disclosure, reducing the problems of information availability.This paper is different from the most studies, which are mainly focused on the stock name and the effect of name change. Most of the research just tests the classical financial anomalies in Chinese stock markets based on the foreign literature. Also, this paper uses Carhart Four-factor Model to test the long term effect and the most past research just uses the regression to test the short term effect.And the following study, we can improve the paper form several aspects: firstly, as we didn't get so many data from first questionnaire, we should the amplify the size of survey to get more data through the web; secondly, we find that some stock names have the information of industry, so we can do a research after classing these stocks; Lastly, we can compare the lucky culture effect between various markets, such as the Main Board, Small Plates, to improve the research.