The winner-loser anomaly and insider trading: Empirical evidence from Hong Kong

This thesis examines the winner-loser anomaly in the Hong Kong stock market and the trading behaviour of a key financial participant – corporate insiders. Using a sample which includes all listed companies on the Hong Kong Stock Exchange (HKSE) from 2003 to 2016, I provide empirical evidence to support the continued existence of the winner-loser anomaly first documented in the US more than 30 years ago. This suggests that investors continue to systematically overreact when making trading decisions even in economies outside the US. To better understand the functioning of the financial market and the behaviour of its participants of different levels of sophistication, I bring corporate insiders into the picture to examine their trading behaviour across the winner and loser stocks, and the effect of their trades on the winner-loser anomaly. The results indicate that the more informed insiders engage in significantly greater insider purchasing in undervalued loser stocks than in overvalued winner stocks in the 12-month period prior to the portfolio formation date. This is consistent with the notion that informed insiders recognize instances of stock price overreaction, and trade against the market in attempt to take advantage of the prevailing misvaluation. I also provide preliminary evidence that informed insiders, through their trades, help in mitigating the overreaction effect to some extent, thereby contributing to better reflection of a firm’s fundamental value. To the best of my knowledge, this thesis is the first to document the economic link between the winner-loser anomaly and corporate insider trading