Crash and jackpot probability anomalies in the Chinese stock market

Abstract

PurposeInvestigation of the anomalies associated with crashes and jackpots in the Chinese stock market.Design/methodology/approachWe propose a logit model to predict the events of crashes and jackpots in the Chinese stock market. The model introduces a new variable of the price-to-sales ratio and takes into account the market states, Up and Down.FindingsThe anomalies associated with crashes and jackpots are not related to variations in economic conditions, but are associated with limits to arbitrage. High-liquidity stocks have strong mispricing effects. The institutions’ speculative trading will push liquid stock prices further away from their fundamentals but avoid buying illiquid stocks with a higher probability of price crashes and jackpots.Originality/valueWe propose a logit model to predict the extreme events of both crash and jackpot in the Chinese stock market. Our model effectively disentangles from CRASHP and JACKP. Compared with the traditional model, it substantially enhances in-sample and out-sample predictions. Based on the predictions of the extreme events, we find two strong and robust pricing effects associated with ex ante CRASHP and JACKP in the Chinese stock market.