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Size, Seasonality, and Stock Market Overreaction
Abstract
Recent research finds that the prior period's worst stock return performers (losers) outperform the prior period's best return performers (winners) in the subsequent period. This potential violation of the efficient markets hypothesis is labeled the “overreaction” phenomenon. This paper shows that the tendency for losers to outperform winners is not due to investor overreaction, but to the tendency for losers to be smaller-sized firms than winners. When losers are compared to winners of equal size, there is little evidence of any return discrepancy, and in periods when winners are smaller than losers, winners outperform losers.
... Setelah penemuan oleh Bondt dan Thaler (1985) maka penelitian penelitian tentang overreaction semakin banyak di teliti oleh peneliti selanjutnya. Zarowin (1990) dalam penelitiannya menemukan saham loser memiliki kinerja yang luar biasa tinggi dibandingkan saham winner selama periode observasi, namun bukan karena overreaction investor melainkan ukuran perbedaan antara winner dan loser sejak loser cenderung lebih kecil dibandingkan winner. ...
... Hasil temuan ini selaras dengan temuan dari Zarowin (1990Zarowin ( ) (1990 dan Cox & Peterson (1994) Fenomena price reversal tidak dipengaruhi oleh overreaction dari investor, tetapi karena firm size (Zarowin, 1990), dan juga karena derajat likuiditas (Cox & Peterson, 1994) sekaligus membantah pendapat dari Bond & Thaler (1985) dan Atkins dan Dyl (1990). Beberapa peneliti lain yang juga menemukan efek diluar overreaction investor terhadap fenomenea price reversal, misalnya Chan (2001) yang berpandangan bahwa investor kurang bereaksi terhadap informasi, Hameed & Mian (2015) dan Da et al (2014) menyatakan bahwa pembalikan lebih kuat relevansinya dengan guncangan likuiditas refleksi dari reaksi berlebihan terhadap informasi spesifik perusahaan. ...
... Hasil temuan ini selaras dengan temuan dari Zarowin (1990Zarowin ( ) (1990 dan Cox & Peterson (1994) Fenomena price reversal tidak dipengaruhi oleh overreaction dari investor, tetapi karena firm size (Zarowin, 1990), dan juga karena derajat likuiditas (Cox & Peterson, 1994) sekaligus membantah pendapat dari Bond & Thaler (1985) dan Atkins dan Dyl (1990). Beberapa peneliti lain yang juga menemukan efek diluar overreaction investor terhadap fenomenea price reversal, misalnya Chan (2001) yang berpandangan bahwa investor kurang bereaksi terhadap informasi, Hameed & Mian (2015) dan Da et al (2014) menyatakan bahwa pembalikan lebih kuat relevansinya dengan guncangan likuiditas refleksi dari reaksi berlebihan terhadap informasi spesifik perusahaan. ...
Tujuan penelitian ini untuk menginvestigasi fenomena overreaction dan price reversal saham serta membuktikan apakah price reversal yang terjadi adalah sebagai akibat overreaction investor di Bursa Efek Indonesia selama periode tahun 2020. Penelitian ini menggunakan data closing price seluruh saham yang terdaftar secara aktif dalam perdagangan serta berturut-turut dalam transaksi harian sejak 10 Januari sampai dengan 20 April 2020. Semua data yang digunakan merupakan data sekunder yang dipublikasikan melalui Bursa Efek Indonesia. Uji hipotesis dalam penelitian ini menggunakan Uji statistik parametrik, yaitu uji beda menggunakan one sample t- test. Hasil pengujian menunjukkan bahwa price reversal yang diindikasikan melalui pertumbuhan harga ektrim IHSG, dimana pertumbuhan tertinggi (winner) dalam 1 hari sebesar 10,19%, terjadi pada hari ke-55 (Tanggal 26 Maret 2020), dan terendah pada hari ke-43 (Tanggal 10 Maret 2020). Pertumbuhan IHSG untuk 2 hari, dimana pertumbuhan IHSG tertinggi untuk 2 hari perdagangan adalah sebesar 1,591% pada hari ke-20 atau Tanggal 6 Februari 2020 dan tererendah sebesar -4,401% pada hari ke-36 atau Tanggal 28 Februari 2020. Penelitian ini tidak menemukan bukti adanya overreaction investor terhadap informasi baru diseputar periode reversal baik pada saat pertumbuhan tertinggi (winner) maupun pertumbuhan terendah (loser) pada saham-saham yang terdaftar di BEI dalam jangka waktu Januari sampai April 2020. Hal ini menunjukkan bahwa peningkatan/ penurunan harga yang ekstrim bukan disebabkan karena investor bereaksi berlebihan terhadap informasi baru baik itu dalam merespon good news maupun bad news. This research aims to investigate the phenomenon of investor overreaction and stock price reversal and prove whether the observed price reversal is a result of investor overreaction on the Indonesia Stock Exchange during the year 2020. The study utilizes closing price data for all actively traded stocks in consecutive daily transactions from January 10 to April 20, 2020. All data used are secondary data published through the Indonesia Stock Exchange. Hypothesis testing in this research employs parametric statistical tests, specifically a one-sample t-test for mean differences. The test results indicate that the price reversal, indicated through extreme IHSG (Indonesia Stock Exchange Composite Index) price growth, does not provide evidence of investor overreaction to new information. The highest growth (winner) in a single day is 10.19%, occurring on the 55th day (March 26, 2020), and the lowest growth occurs on the 43rd day (March 10, 2020). Two-day IHSG growth shows the highest growth of 1.591% on the 20th day (February 6, 2020), and the lowest growth of -4.401% on the 36th day (February 28, 2020). This research does not find evidence of investor overreaction to new information during both the highest growth (winner) and the lowest growth (loser) periods in stocks listed on the Indonesia Stock Exchange from January to April 2020. This suggests that extreme price increases or decreases are not caused by investor overreactions to new information, whether it be good or bad news
... Alonso et G. Rubio [1990] Trabelsi [2003Trabelsi [ , 2008 en Tunisie. Le phénomène de sur-réaction a d'abord été examiné à long terme, sur une période de 3 à 5 ans par W.F.M. De Bondt et R. Thaler [1985, 1987, L.K.C. Chan [1988], et P. Zarowin [1990]. Les études les plus récentes étudient le phénomène à court terme, au niveau du mois, de la semaine, voire du jour. ...
... Les études les plus récentes étudient le phénomène à court terme, au niveau du mois, de la semaine, voire du jour. A.W. Lo et A.C. McKinlay [1990], B.N. Lehmann [1990], A.B. Atkins et A. Dyle [1990] et P. Zarowin [1990] Thaler forment deux portefeuilles. Le premier est constitué des 35 actions les plus performantes au cours d'une période, dite période de formation, de cinq ans (la performance étant mesurée par le cumul des taux en excès de la rentabilité du marché). ...
... En effet, il y a peu de différence de performance subséquente entre les sociétés de même taille ayant eu de médiocres et de bons bénéfices. Dans une seconde étude, consacrée au phénomène taille, P. Zarowin [1990] montre que les perdants ne surpassent les gagnants qu'au mois de janvier. Cet effet janvier est souvent associé à l'effet taille, surtout en ce qui concerne le marché américain. ...
L'objectif de cet article est d’étudier le comportement du portefeuille d’arbitrage qui consiste à prendre simultanément une position acheteur dans le portefeuille perdant et vendeur dans le portefeuille gagnant.
... De Thaler (1985, 1987), Zarowin (1989Zarowin ( , 1990, Ball and Kothari (1989), Contrad and Kaul (1993) and Clare and Thomas (1995) are some prominent works in equity literature that provide evidence of price reversals and market overreactions. The empirical methodologies pursued in their research are quite similar, and they have welldocumented the winner-loser effect relating to the overreaction phenomenon. ...
... However, the previous research on this issue has provided alternative explanations for the return discrepancies between the winners and losers. While the US evidence of De Bondt and Thaler (1987) observe that the winner-loser effect is not primarily a size effect, Zarowin (1990) with the help of some additional statistical test procedures, explains that the markets actually do not overreact to extreme earnings news. The size discrepancies between winner and loser stocks can be responsible for the apparent overreaction phenomenon. ...
... Even though bid-ask spread bias affects the monthly cumulative average returns on low-priced stocks, they do not leverage from the compounding effects. Ball and Kothari (1989) and Zarowin (1990) test the overreaction hypothesis and produce evidence of winner-loser effects in UK markets. While Zarowin (1990) finds the limited evidence of overreaction effects because of the smaller size of loser firms, Ball and Kothari (1989) produce evidence of weaker overreaction when their research uses annual return rather than monthly return. ...
This research investigates the price reversals and stock market overreactions in the Indian stock market over the period 2008-2016. Our test procedures follow the US evidence offered by De Bondt and Thaler (1985, 1987) and Zarowin (1990). Fama's decomposition and Jensen's alpha measures that compute excess returns from the monthly price data on Nifty-included stocks of the National Stock Exchange (NSE) provide the primary inputs for our search process. Consistent with the US evidence, the study finds that the prior losers outperform prior winners in the subsequent one to two years of portfolio formation. The research finds convergences in investor overreactions to price trends prevailing in upside and downside market conditions in India.
... While some did not confirm the existence of price overreactions (Fama and French (1995) and Clements et al. (2009)). Others such as Cox and Peterson (1994) and Zarowin (1990) highlight the importance of the overreaction window to the stability of the momentum or the contrarian price effects. In particular Lehmann (1990) highlights the importance of studying short term price overreactions in developed markets as these overreactions tend to disappear in the longer term in efficient markets. ...
... However, this reaction depended on the size and the speed with which the shock is absorbed. Zarowin (1990) showed that to an extent of the overreaction can be thought of as the January effect as the overreaction mainly occurred in January in some markets. Recently, Dyl et al. (2019) found that after one day of abnormal returns investors overreacted to non-information price movements and under-reacted to firm specific public information raising further questions about the underlying reasons for the overreaction hypothesis. ...
... Several studies with short overreaction windows were conducted (Zarowin (1990), Cox and Peterson (1994), Atkins and Dyl (1990), Kudryavtsev (2013), and Grant et al. (2005) amongst others). In earlier works Atkins and Dyl (1990) and Bremer and Sweeney (1991) found evidence of price reversals after one day of price declines. ...
This paper provides a comprehensive analysis of price effects after one-day abnormal returns and their evolution in the US stock market, using Dow Jones Index over the period 1890–2018. We utilise several statistical tests and econometric methods (the modified cumulative abnormal return approach, regression analysis with dummy variables, R/S analysis (Hurst, 1951), and the trading simulation approach). The results suggest that a strong momentum effect between 1940 and 1980 after a day of positive abnormal returns was present in the US stock market, and it was exploitable for profit. However, after the 1980s this has since disappeared. Overall, price effects after one-day abnormal returns during the analysed period tend to be unstable in terms of their strength and direction (momentum or contrarian effect). Nowadays, the evidence for the price effects after one-day abnormal returns in the US stock market is weak. Our results, therefore, are consistent with the Adaptive Market Hypothesis (Lo, 2004).
... De Thaler (1985, 1987), Zarowin (1989Zarowin ( , 1990, Ball and Kothari (1989), Contrad and Kaul (1993) and Clare and Thomas (1995) are some prominent works in equity literature that provide evidence of price reversals and market overreactions. The empirical methodologies pursued in their research are quite similar, and they have welldocumented the winner-loser effect relating to the overreaction phenomenon. ...
... However, the previous research on this issue has provided alternative explanations for the return discrepancies between the winners and losers. While the US evidence of De Bondt and Thaler (1987) observe that the winner-loser effect is not primarily a size effect, Zarowin (1990) with the help of some additional statistical test procedures, explains that the markets actually do not overreact to extreme earnings news. The size discrepancies between winner and loser stocks can be responsible for the apparent overreaction phenomenon. ...
... Even though bid-ask spread bias affects the monthly cumulative average returns on low-priced stocks, they do not leverage from the compounding effects. Ball and Kothari (1989) and Zarowin (1990) test the overreaction hypothesis and produce evidence of winner-loser effects in UK markets. While Zarowin (1990) finds the limited evidence of overreaction effects because of the smaller size of loser firms, Ball and Kothari (1989) produce evidence of weaker overreaction when their research uses annual return rather than monthly return. ...
This research empirically examines the monetary policy responses towards the oil price pass-through to inflation dynamics in an emerging market like India during the period 2006-2017. Our results, based on vector auto-regressive (VAR) estimation, find low and insignificant crude price transmission to domestic fuel prices due to weighted tax content in the retail prices. The propagation effect of the fuel price hike to headline inflation is dismal or at minimum. The study observes weak causality from monitory policy to headline inflation, while the reverse relationship is found substantial and significant. The findings ultimately suggest the continued adherence to the present rule-based monetary policy framework of pegging policy rates to inflationary expectations in India enables the Monetary Policy Committee (MPC) to recognize the short-term trade-off between inflation and growth, while allows it to stabilize prices in the long-run and across different economic cycles.
... With return reversal effect, an investor could earn a significant abnormal return, which is close to the weak form of an EMH. According to return reversal effect, the preceding period's poorly performed stock (losers) performs better than the previous period's best-performed stocks (winners) in the following period which contradicts with the EMH (Zhang et al., 2018;Malkiel, 2003;Zarowin, 1990). This abnormal return earning behaviour is referred to as the "overreaction" phenomenon. ...
... The other various market anomalies giving rise to overreaction effect are well examined by previous researchers including risk mismeasurement (Chan, 1988), bid-ask spread (Atkins and Dyl, 1990), size effect (Zarowin, 1990) and biases in computed return (Conrad and Kaul, 1993;Dissanaike, 1994). ...
... The returns on small stocks are more sensitive to the risk captured by the size factor than the returns on big stocks that emphasise that the profitability of the long run return reversal effect is associated with size risk. Zarowin (1990) depicted that past loser portfolios are dominated by small size stocks with higher risks that generate a higher return in longer time horizons compared to past winner portfolios of big size stocks and vice versa. Past winner, portfolios with big size stocks of large-scale companies could become loser portfolios. ...
Purpose
The purpose of the study is to examine overreaction effect in the Chinese stock market after the global financial crisis (GFC) of 2007 for all the stocks listed in Shanghai Stock Exchange (SSE) Composite 50 index.
Design/methodology/approach
To capture overreaction effect in the stock listed at SSE 50 Index, a time series analysis of average cumulative abnormal return within a unified framework is applied for the period of January 2009 to December 2015. From these loser and winner portfolios, contrarian strategy is applied to build arbitrage portfolio, which is the difference of mean reversions between loser and winner portfolios. The portfolio construction is based on a 12-month formation period and 6-month testing period for intermediate-term analysis and. for short-term analysis, 6 month formation and 3 month testing periods. The authors also applied regression analysis to test a return reversal effect for the sampled period.
Findings
Results show that contrarian strategy yields positive excess returns for the arbitrage portfolio for most of the testing periods. The intermediate baseline case shows the arbitrage portfolio producing an average excess return of 14.1%, while even the short-term one produces 4%, which is statistically significant at the 5% level. The study finds asymmetrical overreactions in the SSE especially for loser portfolios. The biggest winner and loser portfolios follow the mean reversal effect. Moreover, before-after test for the biggest winner and loser portfolios shows that the losers recovered and beat the market immediately.
Practical implications
The study could benefit government, policy makers and regulators by studying how presence of more individual investors than institutional investors of China stock market leads to more irrational decisions giving rise to volatility. The regulators could build favourable policies for institutional investors to give them incentive to invest more than individual investors through which market volatility could be controlled.
Originality/value
This research contributes to market behaviour research, showing how working under hypotheses of overreaction; gains can be made with contrarian investment strategy through arbitrage portfolios. The authors provide specific additional support for the short and medium-term overreaction in the SSE for the period 2009–2015 using regression analysis.
Contribution to Impact
This research contributes to market behaviour research, showing how working under hypotheses of overreaction; gains can be made with contrarian investment strategy through arbitrage portfolios. We provide specific additional support for the short and medium-term overreaction in the SSE for the period 2009–2015 using regression analysis.
... Penelitian Conrad dan Kaul (1993) menyatakan pembalikan return disebabkan oleh bid ask spread, Zarowin (1990) ...
... Beberapa penelitian menyatakan bahwa pembalikan return disebabkan oleh efek ukuran perusahaan, secara praktis pengaruh efek perusahaan bermanfaat dalam pengambilan keputusan. Implikasinya terhadap over reaksi dapat dilihat pada penelitian Zarowin (1990) yang menyatakan bahwa kecenderungan saham loser mengungguli saham winner tidak tergantung pada ukuran perusahaan saham loser lebih kecil dari pada ukuran perusahaan saham winner. Ising et al. (2006) menyimpulkan bahwa pada penurunan harga yang ekstrim terjadi karena efek ukuran perusahaan, sedangkan untuk kenaikan harga yang ekstrim membuktikan adanya market to book ratios dalam mendeterminasikan nilai dari over reaksi. ...
... Hasil pengujian statistik menunjukkan bahwa investor merespon berita baik dan berita buruk secara berbeda, namun hal ini hanya terjadi pada perusahaan kapitalisasi rendah. Penelitian ini inkonsisten dengan penelitian Zarowin (1990) yang menyatakan bahwa ukuran perusahaan merupakan proksi dari ketersediaan informasi, dimana investor hanya akan merespon saham yang diikuti oleh analist dan investor, dengan kata lain pada saham perusahaan kapitalisasi tinggi. Hasil pengujian penelitian ini menunjukkan bukti yang berbeda, dimana investor over reaksi terhadap saham perusahaan kapitalisasi rendah bukan pada perusahaan kapitalisasi tinggi. ...
... H1: There was a reversal in abnormal returns on the winner-loser stock portfolio in the LQ45 Index. Zarowin (1990) conducted the same study using the same data sets as the De Bondt and Thaler (1985) study. ...
... According to the research by Zarowin (1990), the performance of stocks with small sizes can outperform stocks with large sizes. This performance can be observed from the average CAR in winner and loser stocks, which experienced a significant reversal after being grouped by company size. ...
This study investigates the anomalies of winner-loser portfolios and anomalies of size effect on LQ45 stocks in the Indonesia Stock Exchange (IDX), period 2015-2020. The paired sample t-test (parametric) and Wilcoxon test (non-parametric) are used to test samples. Sample selection is carried out using the non-probability and purposive sampling methods. The shares of companies that met the sample criteria were 26. The primary data used cumulative abnormal returns and market capitalization as proxies for a company's stock size. The anomaly of the winner-loser effect phenomenon is observed by dividing the data into two periods: the formation period and the testing period. The periods are both short-term and long-term. The short-term period is six months, and the long-term is 12 months. The first finding shows reversals in average cumulative abnormal returns (CARs) on the winner-loser stock portfolio. In the testing period, the average CARs were turned down, and many average CARs became negative. Portfolio loser in the testing period, the average CARs reversed to positive. The second is a reversal in average CARs in winner-loser stock portfolios caused by the size effect. The performance of small winner-loser portfolios is proven to outperform big winners' portfolios. The reversal occurs in both the short-term and long-term. This finding suggests that behavioral finance can explain this market anomaly, and it is helpful for investors in coming up with strategies to get abnormal returns.
... The PER ratio occupies a central place in both scientific research and investment practices; it was found to reflect market expectation of estimated growth, is strongly associated with risk (Zarowin, 1990;Thomas & Zhang, 2006;Wu, 2013). The indicator is widely used by analysts, brokers, and portfolio managers for investment strategies. ...
... Many studies have shown that the PER ratio provides a much more reliable image by using net profit forecasted for the next 12 months than the past profit achieved (Beaver & Morse, 1978;Zarowin, 1990;Thomas & Zhang, 2006). ...
p>Professionals in enterprise valuation can use multiple methods and approaches for the valuation mission. To support them, the standards in the matter use the market approach, income approach, and cost approach. The market approach or comparison approach refers to determining the value of an entity or the common equity of an entity using direct comparison with other enterprises or similar shares traded on the free market (the price of which is public). The sources of information concerning such data are mainly the stock exchanges and the M&A (mergers and acquisitions) operations and preceding transactions with similar companies. The most common multiples in the market-based approach are PER (Price Earnings Ratio), PEG (Price Earnings to Growth), and EV/EBITDA. Within this study, we highlighted the extent to which these multiples reflect or not the market value of the companies analysed, as defined by the stock exchange mechanism. Furthermore, to achieve this goal we set out to establish the validity of three hypotheses regarding the ability of multiple-based methods to highlight a stock’s market price. Using a quantitative approach and historical data we demonstrated that market-based multiples are a safe way to obtain an enterprise’s fair value, pointing out that results vary slightly depending on the variables used.
JEL : M40, M41, M49
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... Overreaction hypothesis is one challenge of market efficiency theories that build the foundations of behavioral finance. The prominent works on the overreaction hypothesis include De Thaler (1985, 1987), Ball and Kothari (1989), Zarowin (1990), Clare and Thomas (1995), Wang and Wu (2011) and Smith and McMillan (2016). Although most studies showed the 'winner-loser effect', showing the spontaneous reactions of stock prices to unexpected and dramatic news events, the statistical model they suggest is a fresh piece of the puzzle for understanding extreme price behavior. ...
... Overreaction hypothesis is one challenge of market efficiency theories that build the foundations of behavioral finance. The prominent works on the overreaction hypothesis include De Thaler (1985, 1987), Ball and Kothari (1989), Zarowin (1990), Clare and Thomas (1995), Wang and Wu (2011) and Smith and McMillan (2016). Although most studies showed the 'winner-loser effect', showing the spontaneous reactions of stock prices to unexpected and dramatic news events, the statistical model they suggest is a fresh piece of the puzzle for understanding extreme price behaviour. ...
Purpose
Equity research in experimental psychology reveals investors' overreactions to bad news events. This study of asymmetric price structures in equity markets investigates whether such behavior predicts stock returns in an emerging market of India.
Design/methodology/approach
The research decomposes Bombay Stock Exchange (BSE) Sensex returns into Extremely Positive Returns (EPR) and Extremely Negative Returns (ENR) based on extreme values at first and then tests their lead–lag relations.
Findings
The empirical finding is consistent with the existing evidence of asymmetric news effects on stock returns in India. In precise, ENR robustly predicts one-month-ahead EPR for the sample period from January 1991 to March 2020. This predictive power persists even in the presence of popular valuation ratios and business cycle variables.
Practical implications
The paper explains the rationale of extreme value modeling in price forecasting. Investors can find additional utility gains from market cycle information while predicting extreme returns in Indian stock market.
Originality/value
The paper is unique to understand business cycle effects in extreme return reversals in emerging markets.
... According to Zarowin (1990), smaller companies have a greater tendency of becoming loser firms because losers, by definition, are firms that have lost market share to winners. In his study of US companies over the period from 1932 to 1977, he found that the average size of losers was smaller than the average size of winners in 13 of the 17 non-overlapping 3-year periods under examination, and that 'the averages of the quintile ranks for losers and winners [also] show that losers tend to be among the smaller firms, while winners tend to be among the larger ones'. ...
... The finding of Zarowin (1990) is interesting as it raises the possibility that the Halloween effect that we have found in the long-term reversal anomaly in this study is simply a reflection of the same Halloween effect that Auer (2019) identified in the size anomaly. To check the robustness of our findings, we controlled for the size effect by investigating the long-term reversal factor by using portfolios of firms of similar sizes. ...
In this paper, we investigate the presence of the Halloween effect in the long-term reversal anomaly in the US. When we examine the cross-sectional returns of winner-minus-loser portfolios formed on prior returns over the time period of 1931-2021, we find evidence of stronger returns during winter months versus summer months. In particular, the effect appears to be driven by very strong winter-summer seasonality in the portfolio of small-capitalisation losers, and lack of Halloween effect in the portfolio of large-capitalisation winners. Our finding is robust to alternative measures of long-term reversal, differing sub-periods, the inclusion of the January effect and outlier considerations, as well as within small and large-sized companies.
... Their findings suggest that corporate governance and performance have strong effects on stock price overreaction during political crises. The effects of firm characteristics on stock price volatility have been investigated in various studies (Schwert, 2011(Schwert, , 1989(Schwert, , 1990Black, 1976;Bierman, 1968;Christie, 1982;Zarowin, 1990;Karpoff, 1987;Chopra et al., 1992). However, to the best of our knowledge, there has been no investigation that identifies the determinants of stock price overreaction and volatility at the firm level during the COVID-19 pandemic. ...
... The stock market overreaction hypothesis has been examined over both long-run and short-run periods. Studies on long-run overreaction find that stock prices deviate temporally from their fundamental values due to waves of optimism and pessimism (De Bondt and Thaler, 1985;Zarowin, 1990;Pettengill and Jordan, 1990). Short-run overreaction studies focus on biases in the market reaction to the arrival of new information, such as Atkins and Dyl (1990) and Bowman and Iverson (1998). ...
Purpose – This study aims to investigate which stock characteristics and corporate governance variables affect stock price overreaction and volatility during the COVID-19 pandemic period.
Design/methodology/approach – A set of stock characteristics and corporate governance variables which may affect price overreaction and volatility were identified following a review of the literature. A dummy variable was created for the cross-sectional analysis to take into account the unique sector effect in the consumer staples sector. Out of sample analysis was conducted to confirm the robustness of the main results.
Findings – The empirical results consistently show that size, dividend and trading volume determine the stock price reactions when the market is in turmoil during the pandemic period. Board size and average board tenure exhibit moderate effects on reducing the stock price reactions, but the effects become insignificant while controlling for the firm characteristics in the regressions. The results remain robust when tested out of the sample. More interestingly, a consumer staples sector effect is identified and tested. The test results show that the consumer staples sector effect mitigates the stock price reactions.
Practical implications – The results have practical implications for investors who aim to manage desired levels of risk in their portfolios during the pandemic. The results also provide meaningful insights to stock market speculators regarding pandemic-related speculation opportunities.
Originality/value – This study makes a meaningful connection between the irrational stock market anomalies and the COVID-19 pandemic.
... Perspektif jangka panjang menyatakan bahwa harga saham secara temporer menyimpang dari nilai fundamental disebabkan karena gelombang optimisme dan pesimisme. Umumnya diteliti menggunakan return bulanan (monthly), diantaranya telah diteliti oleh antara lain, De Bondt dan Thaler (1985), Zarowin (1990), Chopra, Lakonishok dan Ritter (1992. Perspektif jangka pendek lebih fokus pada bias reaksi pasar terhadap kedatangan informasi yang dramatis dan yang tidak terekspektasi (unexpected). ...
... De Bond dan Thaler (1987), menemukan bahwa reaksi-lebih ini berimplikasi pada dimungkinkannya para investor menerapkan strategi kontrarian untuk memperoleh keuntungan atau abnormal return. Zarowin (1990); Chopra, Lakonishok dan Ritter (1992), mereka menemukan bahwa strategi kontrarian memperoleh abnormal return, bahkan ketika sudah dilakukan kontrol terhadap perubahan risiko. Chopra, Lakonishok dan Ritter (1992) menemukan bahwa fenomena reaksi-lebih pada perusahaan-perusahaan kecil lebih besar dibandingkan dengan perusahaan-perusahaan besar. ...
The efficient market hypothesis implies that no investor can get an abnormal return. This hypothesis has become a research topic that many researchers refer to. However, this hypothesis is strongly refuted after the discovery of several anomalies that are inconsistent with the efficient market hypothesis. One of them was found by De Bondt and Thaler (1985), that stock prices have a certain tendency, namely that stocks that perform well in one period will become stocks that perform poorly in the next period. Vice versa. This phenomenon is called overreaction or overreaction. These findings motivated further researchers to apply contrarian strategies to gain an advantage when there was an overreaction. This research is a study that is intended to obtain evidence of the ability of contrarian strategies in obtaining abnormal returns. This study aims to analyze the occurrence of overreaction on stocks on the Indonesia Stock Exchange and to analyze the advantages of implementing a contrarian strategy for investors. This research was conducted at companies listed on the Indonesia Stock Exchange. The companies selected were 100 companies with the most active transactions during 2019. From the results of data analysis, it can be concluded that there was a price reversal for the shares listed on the Indonesia Stock Exchange. This result is quite strong because it has been tested for up to 4 weeks. Despite the price reversal, the contrarian strategy was not able to generate significant returns for investors.Keywords :contrarian strategy, abnormal return, overreaction
... Various seasonality patterns characterise the evolution of financial markets Rozeff and Kinney Jr (1976), Gultekin and Gultekin (1983), Seif, Docherty, and Shamsuddin (2017), Fang, Lin, and Shao (2018), Keim (1983), De Bondt and Thaler (1987), and Zarowin (1990). The patterns emerge due to the market architecture and the geographical distribution of trading centres across the world. ...
... The reduced attention results in news effects being incorporated noticeably slower into prices than within the active trading periods. We also underline the relevance of other research works on the stock market seasonality: Keim (1983), De Bondt and Thaler (1987), and Zarowin (1990), among others. ...
... For more surveys and explanations on mean reversion in stock prices, see among others, [18,19,[20][21][22][23][24][25][26][27]. This paper contributes and extends the existing knowledge by modeling volatility mean reversion in stock prices in Nigerian stock market with policy implications for long-term investment horizons using more recent data. ...
... In order to select the optimal ARCH model for the returns series, we use the log-likelihood function specified in equation (19). The result of the estimates is reported in Table 4. ...
What goes up must surely come down, is a widely held view by Economists. In stock market, this view translates into long-run mean reversion which asserts that a decrease in stock prices is most likely to be followed by an increase price movement, and vice versa. This paper attempts to study and model the volatility mean reversion in Nigerian stock market using GARCH models. The 7UP Bottling Company Nigeria Plc daily closing share prices of the Nigerian stock exchange is used as a proxy for Nigerian stock market. The data used for the analysis ranges for the period 1/02/1995 to 24/11/2014. The paper employed Augmented Dickey-Fuller unit root test to study the unit root, stationarity and mean reverting properties of the series. Volatility of stock prices was modeled using ARCH (5) and GARCH (1,1) models with Gaussian errors. The unit root and stationarity test indicates that the returns are stationary and hence mean reverting. The results of ARCH (5) and GARCH (1,1) models showed evidence of volatility clustering and mean reversion in Nigerian stock market. The conditional volatility was found to be quite persistence. The estimated basic GARCH (1,1) model using Gaussian errors was found superior over ARCH (5) model. The study recommends that given the impact of mean-reversion of stocks on asset allocation decisions and the profitability of trading strategies, it is important for investors to know whether or not stock prices and stock returns exhibit mean reversion before investing heavily in them as mean reverting stocks are less risky.
... Proxies to earnings as ROCE, ROA and ROE are carefully examined while determining the IPO pricing. Earnings influence the market reaction (Zarowin, 1990). In this study, we examine the linkages of earnings with listing day return. ...
Pricing of an Initial public offering (IPO) is a complex phenomenon. Price anomalies are commonly observed in IPO markets, especially in emerging markets. Investors perceived underpricing creates undue market momentum during the offer period with an asymmetric effect across different issue sizes. This study examines the determinants of Book Built IPOs underpricing by considering a sample of 180 Book Built IPOs that went public in India between 2011 and 2020. The determinants were verified for differential issue size public offers. Listing day performance was measured using Listing Day-Absolute Return (LD-AR) and Listing Day-Market Adjusted Return (LD-MAR) models. Further, the data obtained was tested for the explanatory capabilities of firm-specific and market momentum factors for underpricing using OLS models. Concerning the differential issue size, the study found a direct relationship between the issue size and underpricing. Dominant underpricing was observed in the case of moderate to large issue size with a linear progressive return, confirming that there was over-optimism on the part of investors. The study’s results also revealed that momentum-specific factors have a significant influence along with firm-specific factors such as firm size, cash flows, a subscription rate of QIBs and RIIs in the listing day return, and underpricing.
... The lower the investor's knowledge of the effects of new information, the greater the tendency for overreaction to occur this phenomenon is also known as the Winner -Losser Effect. Price reversal can also be influenced by firm size, where on average the size of the loser company is smaller than the winner company (Zarowin, 1990) so overreaction is manifested especially in small firms (Clare & Thomas, 1995). Although there are also research results that conclude that there is no evidence showing that effect size explains the difference in performance between winners and losers in the stock market (Dissanaike, 2002). ...
The Covid-19 pandemic has had an impact on various aspects of life, including the capital market which has caused a negative response on most stock exchanges around the world, including the Indonesia Stock Exchange. The Effecieny Market Hypothesis (EMH) explains that the price of a stock will always be reflected from the information available in the market or investors tend to be rational. However, dramatic events such as COVID-19 allow investors to overreact. The results showed that there was an overreaction in both winner and loser stocks in the LQ 45 group on the IDX in 3 months of observation since covid was announced as a pandemic. This overreaction is then followed by a price reversal even though it has not given a significant return after t+13 for both winner and losser stocks. The speed of price recovery (magnitude effect) after the price reversal on the loser stock is higher (faster) than the winner stock. The speed of this price recovery is significantly affected by the company's capital structure and share ownership of individual investors (local and foreign).
... Subsequent research focusing on the U.S. stock market by Brown and Van Harlow (1988), Chopra et al. (1992), and Ma et al. (2005) also provide substantial support for the overreaction hypothesis. In another study focusing on stock price overreaction, Zarowin (1990) re-examined the evidence that was reported by De Thaler (1985, 1987). The author found a significantly positive difference in abnormal returns between the loser and winner portfolios that were invested in the U.S. stock market. ...
The purpose of the study is to investigate the overreaction hypothesis in relation to the Ho Chi Minh Stock Exchange (HOSE). The data used in this study consist of a monthly price series of 392 stocks traded on the HOSE, covering the period starting on 5 January 2004 through to 30 June 2021. The findings derived from the tests examining the differences in excess returns across the winner and loser portfolios confirm that the overreaction phenomenon exists in the HOSE. More specifically, following the creations of the portfolios, the loser portfolio outperformed the winner portfolio by 1.80% and 2.17% in the second and third month, respectively. In addition, the differences in cumulative abnormal returns between the loser and winner portfolios were significantly positive for almost all tracking periods. These findings support the hypothesis that the Vietnam stock market is inefficient in its weak form. Based on these results, we suggest that investors can earn abnormal returns by using contrarian trading strategies in the Vietnam stock market.
... Entretanto, outros estudos comprovam resultados distintos. Chan (1988), Davidson e Dutia (1989) e Zarowin (1990) entendem que o tal fenômeno não permanece estável, ou ainda, que tais retornos podem estar mais ligados ao tamanho da empresa em si do que à presença de sobrerreação. ...
This paper aims to analyze the hypothesis of overreaction and under-reaction over the profitability of the Brazilian stock market. The theoretical review was based on the Market Efficiency and Behavioral Finance Hypothesis. Economática SA’s database was used, from where it was collected information about 1,283 stocks (571 active and 712 canceled) between January 1999 to December 2017, representing a sample of 228 months. It was applied the methodology developed by DeBondt and Thaler (1985) and Jegadeesh and Titman (1993), where portfolios composed of the upper and lower quintiles were created, based on the ranking of past stock returns. Through the means comparison test, it was possible to verify evidence that there is a phenomenon of overreaction for events of negative character after 6, 12 or 18 months of holding. However, no abnormal return was observed for overreaction of positive character events, nor any sub-reaction phenomena. Regarding investor sentiment, the results show that there is a relationship between it and the return of some strategies based on past return, contrary to EHM in its weak form.
... Prior research has used a number of different methodological approaches to determine whether prices in a market are efficient or not. Earlier studies on market efficiency measured efficiency through various statistical methods, such as the capital asset pricing model Thaler, 1985, 1987;Zarowin, 1990), and the unit root and augmented Dickey-Fuller methods (Baillie and Bollerslev, 1989;Meese and Singleton, 1982). Other authors have used mean reversion and/or variance ratio test as evidence of random walk (Bali et al., 2008;Chaudhuri and Wu, 2003;Fama and French, 1988;Lo and Mackinlay, 1988;Poterba and Summers, 1988). ...
We examine whether the differences in the legal origins of countries (Common Law versus Civil Law) can explain the variations in the price efficiencies of the stock markets of different countries. Based on multifractal detrended fluctuation analysis of the daily stock indices of 34 countries over 21 years, we find that the stock price indices in Common Law origin countries show greater price efficiency than the stock price indices in Civil Law countries. These results provide additional evidence that the legal origins of countries affect their economic activities and outcomes.
... (De Bondt & Thaler,1985;1987;Alonso & Rubio,1990;Konstam, 1990;Dissanaike, 1997;Xing-qiang & Zhi-ping, 2007 (Chan, 1988 ;Zarowin, 1990;Clare & Thomas, 1995;Assoe & Sy, 2003 (Jegadeesh & Titman, 1993;Grinblatt, Titman, & Wer-mers, 1995;Rouwenhorst, 1998;Hong, Lim, & Stein, 2000;Dijk & Huibers, 2002;Forner & Marhuenda, 2003;Ismail, 2012) . , 1987;Alonso & Rubio, 1990;Konstam, 1990;Dissanaike, 1997;Hameed & Ting, 2000;Forner & Marhuenda, 2003;Xingqiang & Zhi-ping, 2007;Mclnish, Ding, Pyun, & Wongchoti, 2008;Hsieh & Hodnett, 2011;Ismail, 2012 p.value عل ال ر شه ثﻼثة ERwp - ٤٫١٨ ٪ ٠٫٠٠٥ *** ERlp > ERwp ERlp ٤٫٠٤ ٪ ر شه ة س ERwp ٤٫٤٤ ٪ ٠٫٣٢٣ ERwp = ERlp ERlp ٩٫٠٣ ٪ ر شه عة ت ERwp ٣٫٥٤ ٪ ٠٫٢٨٣ ERwp = ERlp ERlp ١١٫٣٤ ٪ ً ا شه ع ى اث ERwp ١٤٫٢٩ ٪ ٠٫٦١٦ ERwp = ERlp ERlp ١٨٫٣١ ٪ ال الثالث العدد والتمويل التجارة العلمية مجلة ج ٢ سبتمبر ٢٠٢٢(١١٫٨ - ٠٫٠٤ ٠٫٣٦ ٠٫٠٨ - ٠٫٢٠ ٠٫٤٤ ٢٫٨٥ ١٣٫٨ ٪ ١٫٨٣ T- Statistic ٤٫٠٢ - ٠٫٢٥ ٢٫٢٥ ٠٫٥٩ - ١٫٦٨ ٢٫٢٢ p. value ٠٫٠ *** ٠٫٨ ٠٫٠٣ ** ٠٫٥٦ ٠٫١ * ٠٫٠٣ ** ٠٫٠٢ ** Condition index ١٫٠٠ ١٫١٤ ١٫٤٧ ١٫٥٤ ١٫٥٩ ١٫٨٠ ال الثالث العدد والتمويل التجارة العلمية مجلة ج ٢ سبتمبر ٢٠٢٢(١٨٫٠٣ - ٠٫٢٢ ٠٫١٤ - ٠٫١٦ - ٠٫٦٣ ٠٫٢٧ ١٫٢١ ٣٫٧ ٪ ٢٫٣٠ T-Statistic ٢٫٠٢ - ٠٫٩٥ ٠٫٢٨ - ٠٫٥١ - ١٫٩٢ ٠٫٩٥ p. value ٠٫٠٥٦ * ٠٫٣٦ ٠٫٧٨ ٠٫٦٢ ٠٫٠٦٨ * ٠٫٣٥ ٠٫٣٣١١٫١٣ - ٠٫٦١ - ٠٫٥٩ - ٠٫١٢ - ٠٫٩٨ - ٠٫٣٢ ٢٫٤٣ ٢٨٫٤ ٪ ١٫٢٩ T- Statistic ٠٫٨١ - ١٫٨٩ - ١٫٦٧ - ٠٫٤٥ - ٢٫٦٦ - ٠٫٥٤ p. value ٠٫٤٣ ٠٫٠٨ * ٠٫١٢ ٠٫٦٦ ٠٫٠٢ ** ٠٫٦٠ ٠٫٠٩ * Condition index ١٫٠٠ ١٫٢٠ ١٫٥٨ ٢٫٤٣ ٤٫٥٥ ...
... For example, momentum strategy states that the stock will continue to rise or continue to decline in the short term (Jegadeesh and Titman 1993), while contrarian strategy implies the price will adjust as reverse (De Bondt and Thaler 1985). Many researchers such as Zarowin (1990), Moskowitz and Grinblatt (1999) and Conrad and Kual (1998) study the behavioral biases, addressing the time-varying risk and abnormal systematic returns based on the seasonal effect, the trading strategies, the financial series predictability, crosssectional variation in the mean returns and so on. Representativeness heuristic (Kahneman and Tversky 1973), anchoring bias (Tversky and Kahneman 1974), mental accounting (Hirshleifer 2001), overconfidence (Pallier et al. 2002), the stock split effect (Desai and Jain 1997;Ikenberry et al. 1996), The dividend yield effect (Litzenberger and Ramaswamy 1982;Keim 1985), Insider transaction effect (Finnerty 1976), Country effect (Gultekin et al. 1983), Neglected firms effect (Arbel and Strebel 1983), Index effect (Harris and Gurel 1986). ...
The purpose of this research is to reclassify behavioral biases in financial markets into two types of historical- and current-oriented ones. In this study, new models were developed for measuring the size of historical-oriented behavioral biases based on the random walk and current-oriented ones based on changes in the P/E ratio. Data for the TEPIX index of Tehran Stock Exchange and the S&P500 index from 05/14/2014 to 06/13/2021 showed that criteria developed for the historical- and current-oriented biases are, respectively, 71 and 15.8 times more for the TEPIX compared to S&P500. So, the results of this study imply that underdeveloped financial markets such as the Tehran Stock Exchange, suffer from large frictions and widespread inefficiencies that should be addressed by policy makers.
... Challenging the claims of many well-known studies on market efficiency (see Fama 1970, Rosenberg et al. 1985, Fama 1991, Fama and French 1998, there is substantial evidence in the literature to believe that asset returns are predictable (Clare and Thomas, 1995). The pioneering studies that are more prominent in illustrating the price reversals as a challenge to market efficiency (for example, Debondt and Thaler, 1985, Zarowin 1990, Chopra et al. 1992, Clare and Thomas 1995 link the two concepts through market overreactions. More recent evidences of Wang and Wu (2011), Cakici and Topyan, (2014), Smith and McMillan (2016), and Piccoli et al. (2017) contribute to the debate over the causes of price reversal and momentum in financial markets. ...
Purpose
Research on price extremes and overreactions as potential violations of market efficiency has a long tradition in investment literature. Arguably, very few studies to date have addressed this issue in cryptocurrencies trading. The purpose of this paper is to consider the extreme value modelling for forecasting COVID-19 effects on cryptocoin markets. Additionally, this paper examines the importance of technical trading indicators in predicting the extreme price behaviour of cryptocurrencies.
Design/methodology/approach
This paper decomposes the daily-time series returns of four cryptocurrency returns into potential maximum gains (PMGs) and potential maximum losses (PMLs) at first and then tests their lead–lag relations under an econometric framework. This paper also investigates the non-random properties of cryptocoins by computing the incremental explanatory power of PML–PMG modelling with technical trading indicators controlled. Besides, this paper executes an event study to identify significant changes caused by COVID-19-related events, which is capable of analysing the cryptocoin market overreactions.
Findings
The findings of this paper produce the evidence of both market overreactions and trend persistence in the potential gains and losses from coins trading. Extreme price behaviour explains volatility and price trends in crypto markets before and after the outbreak of a pandemic that substantiate the non-random walk behaviour of crypto returns. The presence of technical trading indicators as control variables in the extreme value regressions significantly improves the predictive power of models. COVID-19 crisis affects the market efficiency of cryptocurrencies that improves the usefulness of extreme value predictions with technical analysis.
Research limitations/implications
This paper strongly supports for the robustness of technical trading strategies in cryptocurrency markets. However, the “beast is moving quick” and uncertainty as to the new normalcy about the post-COVID-19 world puts constraint on making best predictions.
Practical implications
The paper contributes substantially to our understanding of the pricing efficiency of cryptocurrency markets after the COVID-19 outbreak. The findings of continuing return predictability and price volatility during COVID-19 show that profitable investment opportunities for cryptocoin traders are prevailing in pandemic times.
Originality/value
The paper is unique to understand extreme return reversals behaviour of cryptocurrency markets regarding events related to COVID-19 breakout.
... Esta estraé baseada na ideia de que os mercados reagem excessivamente Ltjverreaction")~s notícias, pelo que os activos vencedores se encontram brnorma sobreavaliados e os activos perdedores subavaliados220. Inquanto alguns economistas atribuem o fenómeno ao risco das estrã ias contrárias (Chari (1988) e Bail e Kothari (1989))~, outros autores ¶éndem que o fenómeno se deve a outras anomalias, afirmando quẽ ongo prazo este se dilui perante outros factores como o efeito Janeiro, feito dimensão ou o efeito preço (Zarowin (1990), Conrad e Kaul (1993), í9tas e Cakici (1999) e Chopra et ai. (1992)). ...
... Banz (1981) argues that the equities of companies with low market capitalisation generate disproportionately high returns compared to companies with high market capitalisation. Zarowin (1990) also argues that overreaction is attributable to differences in size. In selecting the sample, we made efforts to include in the sample only equities that may be Study Klaudia Rádóczy -Ákos Tóth-Pajor a relevant investment target for investors. ...
This paper examines investors’ reactions to extreme events in the Hungarian stock market. We seek to answer the research question whether following extreme events any overreaction of investors can be observed on the Budapest Stock Exchange. With a view to answering the research question, we identify extreme events based on extreme returns on the market portfolio and then – using an event study – we examine abnormal returns on winner and loser equities. After examining investors’ reactions, we inspect the performance of the contrarian strategy in the created event windows. The main result of our research is the presentation that – based on the analysis of the differences between the average cumulative abnormal returns after extreme events – investor overreactions can be observed in the Hungarian stock market. The loser portfolios relating to extreme events significantly outperform winner portfolios connected to the event. The excess return of the contrarian strategy cannot be attributed to differences in the market risk of winner and loser portfolios. The excess return of the strategy can be shown only under tighter extreme value thresholds. The clustering of the event windows with short-term reversal, high market volatility and extreme events is beneficial to the performance of the contrarian strategy. In addition, our research also shows that the purchase of loser portfolios or the development of a contrarian strategy after extreme events may generate profit for investors, since after extreme events the loser portfolios usually beat the market on a horizon of 21 days.
... válasszal szolgálva arra a kritikára is, hogy veszteseknél többlethozam azért figyelhető meg, mert közöttük több a kis méretű vállalat.Banz (1981) amellett érvel, hogy a kis kapitalizációjú vállalatok részvényei a kockázathoz viszonyítva aránytanul magas hozamokat termelnek a nagyobb kapitalizációjú vállalatokkal szemben.Zarowin (1990) szintén amellett érvel, hogy a túlreagálást Rádóczy Klaudia -Tóth-Pajor Ákos a méretbeli különbségek okozzák. A mintaválasztás során arra törekedtünk, hogy a mintába csak olyan részvények kerüljenek be, amelyek releváns befektetési célpontot jelenthetnek a befektetők számára. Az adatok szűrését követően összesen 9 részvény maradt a mint ...
A tanulmányban az extrém eseményekre adott befektetői reakciókat vizsgáljuk a magyar tőkepiacon. Arra a kutatási kérdésre keressük a választ, hogy az extrém eseményeket követően megfigyelhetők-e túlzó mértékű befektetői reakciók a Budapesti Értéktőzsdén. A kutatási kérdés megválaszolása érdekében az extrém eseményeket a piaci portfólió kiugró hozamai alapján azonosítjuk, majd eseményablak-elemzés segítségével megvizsgáljuk a nyertes és a vesztes részvények abnormális hozamait. A befektetői reakciók vizsgálatát követően a kontrariánus stratégia teljesítményét vizsgáljuk meg a kialakított eseményablakokban. Kutatásunk legfontosabb eredménye annak bemutatása, hogy az extrém eseményeket követően az átlagos kumulált abnormális hozamok közötti különbségek vizsgálata alapján a túlzó mértékű befektetői reakciók igazolhatók a magyar tőkepiacon. Az extrém eseményekhez kapcsolódó vesztes portfóliók szignifikánsan felülteljesítik az eseményhez kapcsolódó nyertes portfóliókat. A kontrariánius stratégia többlethozama nem a vesztes és nyertes portfóliók piaci kockázatában megfigyelhető különbségeknek tulajdonítható. A stratégia többlethozama csak szigorúbb extrémérték-határok mellett mutatható ki. A reverziót tartalmazó eseményablakok, a magas piaci volatilitás és az extrém események klasztereződése a kontrariánus stratégia teljesítményének kedvez. Kutatásunk továbbá arra is rámutat, hogy az extrém eseményeket követően a vesztes portfóliók megvásárlása vagy egy kontrariánus stratégia kialakítása nyereséget termelhet a befektetők számára, mert az extrém eseményeket követően a vesztes portfóliók a 21 napos időtávon a legtöbb esetben megverik a piacot.
... Entretanto, outros estudos comprovam resultados distintos. Chan (1988), Davidson e Dutia (1989) e Zarowin (1990) entendem que o tal fenômeno não permanece estável, ou ainda, que tais retornos podem estar mais ligados ao tamanho da empresa em si do que à presença de sobrerreação. ...
Esse artigo tem como objetivo analisar a hipótese de sobrerreação e sub-reação, sobre a rentabilidade do mercado acionário brasileiro. A revisão teórica tomou como base a Hipótese de Eficiência de Mercado e Finanças Comportamentais. Foi utilizada a base de dados da empresa Economática SA, pela qual coletou-se dados das 1.283 ações (571 ativas e 712 canceladas) no período de janeiro/1999 a dezembro/2017, representando uma amostra de 228 meses. Aplicou-se a metodologia proposta por DeBondt e Thaler (1985) e Jegadeesh e Titman (1993). Foram cridas carteiras compostas pelo quintil superior e quintil inferior, com base no ranking do retorno passado das ações. Através teste de comparação de médias foi possível verificar evidências que existe fenômeno de sobrerreação para eventos de caráter negativo, após 6, 12 ou 18 meses de retenção. Entretanto, não foi observado retorno anormal para sobrerreação de eventos de caráter positivo, nem qualquer fenômeno de sub-reação. No que diz respeito ao sentimento do investidor, os resultados mostram que há relação entre o mesmo e o retorno de algumas estratégias com base no retorno passado, contrariando a HME na sua forma fraca.
... However, the investor realizes excess market returns, which are likely to compensate for the associated risk of this strategy and are a result of overreaction. Zarowin (1989Zarowin ( , 1990 found evidence of return reversals, although the firms' size discrepancies-not investor overreaction-seemed to be the cause. Likewise, losers outperformed winners considerably in January, thus confirming the January effect. ...
This paper examines the overreaction hypothesis on market indices for three- and five-year investment periods using end-of-month data from 49 Morgan Stanley Capital International indices from December 1970 to December 2018. The returns were computed as holding-period returns, instead of cumulative average returns, to avoid an upward bias. We found economically and statistically significant return reversals for both the three-year and five-year investment periods. When implemented in developed markets only, there is evidence that supports the overreaction hypothesis, although the excess returns are smaller than those observed in the whole sample. Not only did the losers outperform the winners, but the former were also less risky. Notwithstanding these results, the overreaction strategy is sensitive to the periods considered, thus highlighting the possibility that its success is not time stationary.
This paper contributes to the existing stock market anomaly literature by being the first to analyze the benefits of combining two distinct anomalies; specifically, the low-volatility and mean-reversion anomalies. Our results show that on a long-only basis, these two time-varying anomalies could be combined into a double-sort investment strategy that includes some desirable characteristics from each of them, thereby making the portfolio return accumulation more stable over time. As the added-value of low-volatility investing stems mostly from the risk-reduction side, while contrarian stocks are generally highly volatile with remarkable upside potential, the use of the double-sort portfolio-formation in which the contrarian stocks are picked from the sub-set of below-median volatility stocks can shorten the below-market performance periods that have occasionally materialized for plain low-volatility or plain contrarian investors.
Studies conducted in recent years have revealed that, contrary to the Efficient Market Hypothesis, prices do not contain all the information, and that factors such as investor behavior and unexpected events have significant effects on prices and volatility. Uncertainties in the face of an unexpected event not only affect investor behavior, but also negatively affect foreign capital flows. The aim of this study is to determine the effects of the Gezi Park events, the July 15 coup attempt and the change of the Central Bank president on March 19, 2021, which are among the important unexpected events that took place in the last ten years in Turkey, on the Borsa Istanbul Securities Market. For this purpose, ARIMA models were estimated with the weekly time series of the BIST100 index created until the realization date of three events. With the models created, the 12-week forecasts following the events were made and the forecasts and the actual BIST100 index values were compared. After the analysis, it was found that all three events caused significant negative effects on the BIST100 index, the highest negative impact on the index was 17.98% in the first week following the event, the coup attempt on 15 July, considering the 12-week average changes, it was determined that the highest negative effect was caused by the Gezi Park events with 18.5 %. In addition, the findings revealed that, contrary to the Efficient Markets Hypothesis, the market is not efficient and all the factors affecting stock prices are not reflected in the prices, therefore, information reaching the market or unexpected events affect the stock prices. Structured Abstract: Efficient Markets Hypothesis (EPH), put forward by Fama (1970) and accepted as a fundamental and important theory in financial markets for decades; He argues that security prices contain all the information that may affect the price, therefore, an abnormal return cannot be obtained on the security prices. Studies conducted in recent years have led to the questioning of this hypothesis and it has been determined that the markets are not efficient, and there are findings that investor behavior, systematic and non-systematic risks, past price movements are effective on the prices and volatility of securities (DeBondt and
Investor behavior in financial markets has an impact on asset prices. The aim of this study is to explain the asset returns that cannot be explained by classical asset pricing models, with a behavioral asset pricing model, taking into account investor behavior. In the study, the Behavioral Asset Pricing Model (BAPM) proposed by Ramiah and Davidson, which takes into account the risk of noise traders, was tested using the Dynamic Volume Index (DVI). In addition, the Investment Trust Discount (ITD) Index, which is often used as an indicator of investor sentiment in the literature, and the "TK" variable used by Tversky and Kahneman to represent the Prospect Theory Value in the studies of Barberis, Mukherjee and Wang were tested. While testing the models, the Fama-Macbeth two-step regression method was used. In the first step, to estimate the beta coefficients, time series regressions between the excess return rates of the stocks in the sample and the excess return rates of the BIST-All Index were estimated between 01.01.2009 and 31.05.2022. In the second step, a cross-section regression of estimated betas with expected returns was performed. While constructing the DVI, ITD and TK, 158 stocks with a trading volume higher than the average trading volume, 10 Securities Investment Trusts and 238 stocks were used respectively. As a result of the analysis, empirical findings have been reached that the BAPM and TK variable have a positive and significant effect on the expected returns of asset prices and can be used as reference indicators in measuring investor sentiment and explaining investor behavior. In addition, it was concluded that the ITD Index did not have a significant effect on the expected returns.
By providing a solid theoretical basis, this book introduces modern finance to readers, including students in science and technology, who already have a good foundation in quantitative skills. It combines the classical, decision-oriented approach and the traditional organization of corporate finance books with a quantitative approach that is particularly well suited to students with backgrounds in engineering and the natural sciences. This combination makes finance much more transparent and accessible than the definition-theorem-proof pattern that is common in mathematics and financial economics. The book's main emphasis is on investments in real assets and the real options attached to them, but it also includes extensive discussion of topics such as portfolio theory, market efficiency, capital structure and derivatives pricing. Finance equips readers as future managers with the financial literacy necessary either to evaluate investment projects themselves or to engage critically with the analysis of financial managers. Supplementary material is available at www.cambridge.org/wijst.
This study aims to determine how the effect of abnormal return, firm size and bid-ask spread on price reversal. The population in this study were 60 companies in the food and beverage and pharmaceutical subsectors listed on the Indonesia Stock Exchange in the 2017-2019 period. With the purposive sampling method used in this study, 60 companies in the food and beverage and pharmaceutical sub-sector were obtained according to predetermined criteria. The dependent variable in this study is price reversal with abnormal return, firm size and bid-ask spread as independent variables. The analysis technique used in this study is multiple linear analysis.
Based on the analysis, it shows sig. 0.000 <0.050, so that it shows that X1, X2, and X3 simultaneously affect the price reversal. The results of this study indicate that the abnormal return has a significant effect on the price reversal, by showing the sig value. 0.004 <0.050. The firm size variable has a significant effect on the price reversal, by showing the sig value. 0.008 < 0.050. And the bid-ask spread variable has no effect on price reversal, by addressing the sig value. 0.002 < 0.050.
Although firms with sustainable competitive advantage do not yield superior returns in regular years, these firms significantly outperform others during the Covid-19 pandemic. Empirical evidence shows that wide-moat is positively priced by the stock market during the pandemic, which is not the case in the pre-pandemic period. Furthermore, wide-moat firms can generate positive cumulative abnormal returns after the advent of the Covid-19 pandemic. However, the magnitude wanes down as time expands into the future.
The accounting valuation model suggests that the differences between predicted, and market shares-prices are considered as valuation errors while the finance valuation approach proposes that these differences are due to the sentiment of investors. In this paper, we use a new version of the residual income valuation model using American data to calculate the fundamental value of a stock and then examine whether price deviations from their fundamental values are due to macroeconomic or psychological factors. The results show that these differences are explained by important macroeconomic and psychological variables.
Penelitian ini melakukan pengujian terhadap overreaction hypothesis, dalam hipotesis ini disebutkan bahwa portofolio loser setelah perioda pengujian akan memiliki rata-rata abnormal return kumulatif yang lebih baik, sedangkan portofolio winner setelah perioda pengujian akan mengalami pembalikan return, dalam hal ini rata-rata abnormal return kumulatif return portofolio winner akan menunjukkan performance yang semakin memburuk.Fenomena pembalikan return ini dikenal dengan anomali winner-losser.Penelitian ini dengan menggunakan data saham yang terdaftar dalam LQ45 selama perioda 2016-2018, penelitian ini menemukan fenomena pembalikan return secara random, fenomena pembalikan return pada setiap minggu ke 4 secara acak membuktikan bahwa overreaction hypothesis terbukti.Hal ini membuktokan adanya fenomena anomali winner losser di passar modal Indonesia selama perioda 2016-2018.Keywords : overreaction hypothesis, contrarian strategy, market anomaly, portofolio Losser,portofolio winner
We examine whether private companies are valued with a discount compared to publicly traded companies. The analysis is based on a comparison of private company transactions with those of public companies. Whereas prior studies build pairs based on industry membership, we match private companies with public counterparts that are comparable in value relevant firm characteristics, i.e. profitability, risk, and growth, to calculate the percentage difference in valuation multiples. We find that private companies are valued on average with a discount on the EBITDA-multiple of 13% compared to their public counterparts. Private companies sell at lower discounts, if the acquirer firm is publicly listed. As size is associated with lower risk, we show that larger private companies sell at lower discounts.
We perform the longest study of long-run reversal in commodity returns. Using a unique dataset of 52 agricultural, industrial, and energy commodities, we examine the price behavior for the years 1265 to 2017. The findings reveal a strong and robust long-run reversal effect. The returns of the past one to three years negatively predict subsequent performance in the cross-section of returns. The effect is robust to extensive subsample and subperiod analysis, and not driven by statistical biases, extreme events, or macroeconomic risks. Our findings support the explanation that the long-term reversal originates from supply and demand adjustments following price changes. Finally, the phenomenon is elevated in more volatile commodities and in periods of high return dispersion.
Objective - In an efficient capital market, the price of a stock reflects the outstanding and relevant information. However, some studies find that is the capital markets are not always efficient. Sometimes investors put too high a price, good news and vice versa. That's why there are variety of capital market anomalies such as the price reversal. This research, test share return following one day a big change of the share price in the Indonesia capital market. Methodology/Technique - The unit of analysis in this study are the stocks that listed in the Jakarta Islamic Index. Then we used purposive sampling method for sampling and 21 samples obtained shares. These samples, then classified into 11 shares 10 shares winner and a loser. Analysis the user is paired sample t-test and doubled regression. In addition, double regression analysis with market overreaction, dividend policy, firm size and the January effect as independent variables and price reversal as the dependent variable. Findings - Regression test showed that in the group winner stocks, market overreaction, firm size and January effect have an effect on signs of price reversal. And dividend policy has no significant influence. For the group of loser stocks, market overreaction, dividend policy, firm size and January effect affect both simultaneously and partially on price reversal. Novelty - The study contributes decision making of investors in Indonesia financial market with its evidences. Type of Paper: Empirical Keywords: Market Overreaction; Dividend Policy; Firm Size; January Effect; Price Reversal. JEL Classification: G11, G14, M41.
The purpose of this study is to examine market overreaction phenomenon and market overreaction impact on abnormal return that moderated by size effect of LQ45 index between five years period (2015-2019). Secondary data on Indonesian Stock Exchange website are taken as samples. Wilcoxon test and interaction effects regression test are used to prove the evidences. The Wilcoxon test is developed in order to confirm that market overreaction occurs on winner and loser portfolio. The result shows that market overreaction occurs in the short and long term. Interaction effects regression test shows the size effect as moderating variable does not strengthen or weaken the relationship of market overreaction to abnormal returns. The findings show that company size has an independent effect, which means abnormal returns are more common in large companies. Size effect concept does not occur in the Indonesia Stock Exchange, especially the firms that always in the LQ45 index during the period of research.
Purpose
– The purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers’ gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed.
Design/methodology/approach
– Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart’s (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy.
Findings
– The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios’ alphas are significant, suggesting that the CAPM and the multifactor models are unable to explain return differentials between winners and losers. Our evidence supports two main conclusions. First, stock market overreaction still holds for a sample of large firms. Second, this is robust to the Fama and French’s (1993, 1996) three-factor model and Carhart’s (1997) momentum portfolio. Findings emphasize the relevance of a contrarian strategy when rebalancing investment portfolios.
Practical implications
– Portfolio managers can improve stock returns by selling past winners and buying previous loser large-cap US stocks.
Originality/value
– This paper is the first, to the authors’ knowledge, to examine frequently traded large-cap US stocks to avoid infrequent trading and size concerns.
In relative valuation peer groups of comparable companies are essential to derive the value of the firm. Valuing a target firm that is in financial distress by using a set of healthy peer group firms probably leads to an overvaluation. We examine whether the financial distress risk has an influence on a company’s value and quantify the discount through financial distress. We identify financial distress by Standard and Poor’s long-term issuer ratings and Altman’s z″-score. We then match the identified firms in financial distress with healthy counterparts that are comparable in value relevant characteristics, i. e. profitability, risk, and growth, to estimate the percentage difference in valuation multiples. Using rating information, in every year almost half of the companies are in financial distress whereas by Altman’s z″-score about 20% of the companies in the sample are in financial distress. We find that the discount caused by financial distress makes up about 4–7% of firm value. The discount increases for lower rating classes and lower z″-scores. Besides the degree of financial distress, market downturns as the financial crisis affect the distress discount.
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