Abstract
We conduct an empirical study of investigating determinants of historical average returns in Chinese Stock Markets. The method of study is sorting stocks according to ex ante attributes of stocks, making portfolios using the size of the attributes, and observing their performances afterward. As a result, we find a strong relationship between past maximum returns and average stock returns afterward. From this finding we conjecture that individual investors who cannot make large portfolios and diversify risks are likely to overestimate the value of stocks with large past maximum returns. It makes performance of those stocks worse than stocks with small past maximum returns. This fact suggests that there exists irrational investment behavior in Chinese stock markets.
