Market time-series reversal: evidence from China’s market
Abstract
Upon high-frequency data of China Securities Index 300 (CSI 300) exchange-traded fund and index future contracts, we demonstrate a time-series reversal pattern between the last three-hour returns on current day and those on previous day. Further this reversal is also found in China index future market. This predictability has been illustrated to be both statistically and economically significant, and the significance is stronger on more volatile/higher volume days and non-bearish market state. Extensive regression analysis suggests that the time-series reversal is mainly induced by irrational investor overreaction, not by the lack of liquidity provision. Moreover, the economic value of the reversal pattern is evaluated to yield an outstanding trading performance by executing a market timing strategy.
First published online 02 April 2025
Keyword : time-series reversal, return predictivity, liquidity, overreaction
How to Cite
Xiang, Y., Luo, L., & Yu, X. (2025). Market time-series reversal: evidence from China’s market. Technological and Economic Development of Economy, 1-15. https://doi.org/10.3846/tede.2025.22634
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Murphy, D. P., & Thirumalai, R. S. (2017). Short-term return predictability and repetitive institutional net order activity. Journal of Financial Research, 40(4), 455–477. https://doi.org/10.1111/jfir.12131
Smith, G. (2012). The changing and relative efficiency of European emerging stock markets. European Journal of Finance, 18(8), 689–708. https://doi.org/10.1080/1351847X.2011.628682
Stoll, H. R., & Whaley, R. E. (1990). The dynamics of stock index and stock index futures returns. Journal of Financial and Quantitative Analysis, 25(4), 441–468. https://doi.org/10.2307/2331010
Wang, K. Q., & Xu, J. (2015). Market volatility and momentum. Journal of Empirical Finance, 30, 79–91. https://doi.org/10.1016/j.jempfin.2014.11.009
Wang, Z. (2021). The high volume return premium and economic fundamentals. Journal of Financial Economics, 140(1), 325–345. https://doi.org/10.1016/j.jfineco.2020.10.006
Wind Database. (n.d.). https://www.wind.com.cn
Yang, L. (2022). Last hour momentum in the Chinese stock market. China Finance Review International, 12(1), 69–100. https://doi.org/10.1108/CFRI-06-2021-0106
Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, Article 101528. https://doi.org/10.1016/j.frl.2020.101528
Atkins, A. B., & Dyl, E. A. (1990). Price reversals, bid-ask spreads and market efficiency. Journal of Financial and Quantitative Analysis, 25(4), 535–547. https://doi.org/10.2307/2331015
Bogousslavsky, V. (2021). The cross-section of intraday and overnight returns. Journal of Financial Economics, 141(1), 172–194. https://doi.org/10.1016/j.jfineco.2020.07.020
Chatjuthamard, P., Jindahra, P., Sarajoti, P., & Treepongkaruna, S. (2021). The effect of COVID-19 on the global stock market. Accounting & Finance, 61(3), 4923–4953. https://doi.org/10.1111/acfi.12838
Chordia, T., Roll, R., & Subrahmanyam, A. (2008). Liquidity and market efficiency. Journal of Financial Economics, 87(2), 249–268. https://doi.org/10.1016/j.jfineco.2007.03.005
Chu, X., Gu, Z., & Zhou, H. (2019). Intraday momentum and reversal in Chinese stock market. Finance Research Letters, 30, 83–88. https://doi.org/10.1016/j.frl.2019.04.002
Cushing, D., & Madhavan, A. (2000). Stock returns and trading at the close. Journal of Financial Markets, 3(1), 45–67. https://doi.org/10.1016/S1386-4181(99)00012-9
Da, Z., Liu, Q., & Schaumburg, E. (2013). A closer look at the short-term return reversal. Management Science, 60(3), 658–674. https://doi.org/10.1287/mnsc.2013.1766
De Bondt, W. F. M., & Thaler, R. (1985). Does the stock market overreact? Journal of Finance, 80, 793–805. https://doi.org/10.1111/j.1540-6261.1985.tb05004.x
Elaut, G., Frömmel, M., & Lampaert, K. (2018). Intraday momentum in FX markets: Disentangling informed trading from liquidity provision. Journal of Financial Markets, 37, 35–51. https://doi.org/10.1016/j.finmar.2016.09.002
Foucault, T., Kahan, O., & Kandel, E. (2005). Limit order book as a market for liquidity. Review of Financial Studies, 18(4), 1171–1217. https://doi.org/10.1093/rfs/hhi029
Fung, K. W., Mok, D., & Lam, K. (2000). Intraday price reversals for futures in the US and Hong Kong. Journal of Banking & Finance, 24(7), 1179–1201. https://doi.org/10.1016/S0378-4266(99)00072-2
Gao, L., Han, Y., Li, S. Z., & Zhou, G. (2018). Market intraday momentum. Journal of Financial Economics, 129, 394–414. https://doi.org/10.1016/j.jfineco.2018.05.009
Gao, J., Mao, Y., Xu, Z., & Luo, Q. (2024). Quantitative investment decisions based on machine learning and investor attention analysis. Technological and Economic Development of Economy, 30(3), 527–561. https://doi.org/10.3846/tede.2023.18672
Grant, J. L., Wolf, A., & Yu, S. (2005). Intraday price reversals in the US stock index futures market: A 15-year study. Journal of Banking and Finance, 29(5), 1311–1327. https://doi.org/10.1016/j.jbankfin.2004.04.006
Han, Y., Huang, D., Huang, D., & Zhou, G. (2022). Expected return, volume, and mispricing. Journal of Financial Economics, 143(3), 1295–1315. https://doi.org/10.1016/j.jfineco.2021.05.014
Heston, S. L., Korajczyk, R. A., & Sadka, R. (2010). Intraday patterns in the cross-section of stock returns. Journal of Finance, 65(4), 1369–1407. https://doi.org/10.1111/j.1540-6261.2010.01573.x
Jegadeesh, N. (1990). Evidence of predictable behavior of security returns. Journal of Finance, 45(3), 881–898. https://doi.org/10.1111/j.1540-6261.1990.tb05110.x
Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance, 48(1), 65–91. https://doi.org/10.1111/j.1540-6261.1993.tb04702.x
Jin, M., Kearney, F., Li, Y., & Yang, Y. C. (2020). Intraday time‐series momentum: Evidence from China. Journal of Futures Markets, 40(4), 632–650. https://doi.org/10.1002/fut.22084
Kaul, G., & Nimalendran, M. (1990). Price reversals: Bid-ask errors or market overreaction? Journal of Financial Economics, 28(1–2), 67–93. https://doi.org/10.1016/0304-405X(90)90048-5
Kim, A. Y., Tse, Y., & Wald, J. K. (2016). Time series momentum and volatility scaling. Journal of Financial Markets, 30, 103–124. https://doi.org/10.1016/j.finmar.2016.05.003
Klößner, S., Becker, M., & Friedmann, R. (2012). Modeling and measuring intraday overreaction of stock prices. Journal of Banking and Finance, 36(4), 1152–1163. https://doi.org/10.1016/j.jbankfin.2011.11.005
Lehmann, B. (1990). Fads, martingales, and market efficiency. Quarterly Journal of Economics, 105(1), 1–28. https://doi.org/10.2307/2937816
Liu, Z., Lu, S., Li, B., & Wang, S. (2023). Time series momentum and reversal: Intraday information from realized semivariance. Journal of Empirical Finance, 72, 54–77. https://doi.org/10.1016/j.jempfin.2023.03.001
Lo, A. W., & Mackinlay, A. C. (1990). When are contrarian profits due to stock market overreaction? Review of Financial Studies, 3(2), 175–205. https://doi.org/10.1093/rfs/3.2.175
Moskowitz, T. J., Ooi, Y. H., & Pedersen, L. H. (2012). Time series momentum. Journal of Financial Economics, 104(2), 228–250. https://doi.org/10.1016/j.jfineco.2011.11.003
Murphy, D. P., & Thirumalai, R. S. (2017). Short-term return predictability and repetitive institutional net order activity. Journal of Financial Research, 40(4), 455–477. https://doi.org/10.1111/jfir.12131
Smith, G. (2012). The changing and relative efficiency of European emerging stock markets. European Journal of Finance, 18(8), 689–708. https://doi.org/10.1080/1351847X.2011.628682
Stoll, H. R., & Whaley, R. E. (1990). The dynamics of stock index and stock index futures returns. Journal of Financial and Quantitative Analysis, 25(4), 441–468. https://doi.org/10.2307/2331010
Wang, K. Q., & Xu, J. (2015). Market volatility and momentum. Journal of Empirical Finance, 30, 79–91. https://doi.org/10.1016/j.jempfin.2014.11.009
Wang, Z. (2021). The high volume return premium and economic fundamentals. Journal of Financial Economics, 140(1), 325–345. https://doi.org/10.1016/j.jfineco.2020.10.006
Wind Database. (n.d.). https://www.wind.com.cn
Yang, L. (2022). Last hour momentum in the Chinese stock market. China Finance Review International, 12(1), 69–100. https://doi.org/10.1108/CFRI-06-2021-0106
Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, Article 101528. https://doi.org/10.1016/j.frl.2020.101528