Why the Dogs of the Dow Bark Loudly in China

American Journal of Economics and Business Administration, Vol. 3, No. 3, pp. 560-568, 2011

9 Pages Posted: 31 Dec 2011

See all articles by Carol Wang

Carol Wang

Wright State University

James E. Larsen

Wright State University

Fall Ainina

Wright State University

Marlena Akhbari

Wright State University

Nicolas Gressis

Wright State University

Date Written: August 1, 2011

Abstract

The Dogs of the Dow (Dow Dogs) strategy, which has gained widespread popularity in the U.S., is found to be considerably successful in China’s stock markets. This trading strategy contradicts the well-established efficient market hypothesis. This study examines the cross-sectional variations in the magnitude of the predictive power of the Dow Dogs strategy using Chinese stocks for 1994-2009. Our results suggest that (1) Significant Dow Dogs effect apply to Class A shares, but not Class B shares; (2) Stocks priced between $1 and $5 demonstrate the strongest Dogs effect among all stock price ranges; (3) Changes in share price range has the most powerful impact on risk adjusted return, followed by changes in the AB share class, re-balancing frequency and number of Dogs in the portfolio. Our results suggest that the superior predictive power of the Dow Dogs strategy is mainly driven by behavioral factors. Our overall findings support the behavioral hypothesis in which market inefficiency stems from investors irrationality and herding behaviors. This study provides practical implications to both government regulators and finance practitioners.

Keywords: Dogs of the Dow, China stock market, market efficiency, Dow Jones Industrial Average (DJIA), capital markets, foreign investors, herding behaviors, market economy, Shenzhen Stock Exchange (SZSE), State-Owned Enterprises (SOEs)

JEL Classification: G14, G15

Suggested Citation

Wang, Carol and Larsen, James E. and Ainina, Fall and Akhbari, Marlena and Gressis, Nicolas, Why the Dogs of the Dow Bark Loudly in China (August 1, 2011). American Journal of Economics and Business Administration, Vol. 3, No. 3, pp. 560-568, 2011. Available at SSRN: https://ssrn.com/abstract=1977795

Carol Wang (Contact Author)

Wright State University ( email )

Dayton, 45435-0001

James E. Larsen

Wright State University ( email )

Dept. of Finance & Financial Services 3640 Colonel Glenn Hwy
Dayton, OH 45435
United States
(937) 775-2870 (Phone)
(937) 775-3545 (Fax)

Fall Ainina

Wright State University ( email )

Dayton, 45435-0001
United States

Marlena Akhbari

Wright State University ( email )

Dayton, OH 45435
United States

Nicolas Gressis

Wright State University ( email )

Dayton, 45435-0001
United States

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