Stock Cross-Sectional Return Seasonalities And Seasonal Reversals

The Efficient Markets Hypothesis(EMH)posits that stock prices reflect all information about their intrinsic value.A number of empirical studies in finance,however,have documented seasonal patterns in equity markets,meaning that trading at certain times can produce excess returns,which have challenged the EMH.At present,a new seasonal anomaly has been discovered in the developed and mature stock market:the cross-sectional return seasonalities,that is,the persistent cyclical performance of individual stocks.Nonetheless,one emerging market has so far evaded the attention of academia: Chinese A-share market.We believe that the importance of this market to the global economy and the market divergence of A-shares from traditional markets such as the United States and Europe serves as a justification for a study that concentrate on return seasonalities on A-share market.There are three interesting questions: is there a similar cross-sectional earnings seasonality in China’s A-share market? Does the uniqueness of the market play a role in anomalies of the stock market? How will the new seasonal anomaly affect the Chinese stock market?Based on this,we are the first to comprehensively investigate cross-sectional seasonalities and seasonal reversals in the Chinese A-share market.Empirically,utilizing monthly data from 1997 to 2019 and adopting multivariate and univariate Fama-Macbeth regression,we provide new supporting evidence that there are seasonalities and seasonal reversals in the cross-section.Interestingly,the occurrence of seasonal reversals takes a longer time than that of the U.S.market.Furthermore,these results remain robust after considering the January effect,the Chinese New Year effect(or the February effect),financial crisis and stock market turmoil,earnings announcement,state ownership,securities margin trading and the impact of COVID-19.Secondly,based on the Efficient Market Hypothesis theory and behavioral finance theory,starting from the two explanations of mispricing and risk compensation,we deeply explore the possible explanations of the cross-sectional return seasonality of the A-share market.The tests based upon macroeconomic risk,mood beta,and limits of arbitrage suggest that seasonalities are most likely driven by temporary mispricing.Finally,on the basis of the method of value factor,we construct seasonality and seasonal reversal factors to study the investment value of seasonalities.We find that these factors can significantly increase the Sharpe ratio and capture incremental information in predicting future returns relative to other well-known factors.This thesis has important implications for policy.By providing various trainings to improve individual investors’ professional knowledge,improving the short-selling mechanism,and improving the transparency of listed companies,the efficient and mature development of the stock market can be promoted.