Predicting Extreme Returns in Chinese Stock Market: An Application of Contextual Fundamental Analysis

Abstract

Prior empirical works have illustrated the effectiveness of contextual fundamental analysis for predicting extreme returns in US stock market. This study employs a similar analysis framework to examine extreme returns in the largest emerging (Chinese) stock market. We find that Chinese extreme-performing stocks have many characteristics in common with but some other characteristics inconsistent with their US counterparts, suggesting that Chinese investors might hold their specific preferences to stocks. Furthermore, the likelihoods of predicting Chinese extreme and non-extreme returns are enhanced with the application of contextual fundamental analysis, particularly in identifying bottom-performing stocks.