The Pre-Holiday Effect in China: Abnormal Returns or Compensation for Risk?

Abstract

This study examines the pre-holiday effect in the Chinese stock market. It provides new insights into the weak-form efficiency of China's equity market indexes. Using the GARCH (1,1) model, we find the pre-holiday effect in broad-based Chinese stock returns and in size, value and growth style indexes. Further analysis using a GARCH (1,1)-M model suggests that the pre-holiday effect at both market and industry/sector levels can be attributed to time-varying risk. We show the pre-holiday effect reflects abnormal returns in small-cap, large-cap and growth style indexes while this same effect reflects compensation for bearing risk in value stocks.