The Impact of ‘Hot Hand Effect’ and ‘Gambler's Fallacy’ Related Decision Making Biases on the Maximum Daily Anomaly——Evidence from Chinese Stock Market

Abstract

Abstract:

Motivated by the maximum daily return anomaly discovered in the developed stock markets, this paper investigates whether this anomaly exists in emerging stock markets and what drives this anomaly. We believe that investor's ‘hot hand effect’ and ‘gambler's fallacy’ related decision making biases can explain this kind of anomaly. Because corporate information transparency can affect the ex-tent of these two decision making biases, and the investor sentiment can affect the relative persistence of these two kinds of biases, the magnitude of the maximum daily anomaly is affected by corporate information transparency and investor sentiment. Basing on the sample from Chinese Stock Market, we obtain enough evidence to support the above opinions. Our findings in this paper are helpful for investors to improve investment efficiency, for listed companies to improve market value ability, and for regulatory authorities to improve regulating efficiency.

Key words: hot hand effect, gambler's fallacy, investor sentiment, corporate information transparency, maximum daily return anomaly

Ye Jianhua. The Impact of ‘Hot Hand Effect’ and ‘Gambler's Fallacy’ Related Decision Making Biases on the Maximum Daily Anomaly——Evidence from Chinese Stock Market[J]. , 2016, 28(11): 30-39.

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