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The overreaction hypothesis and the UK stockmarket
... Over the past many decades, market efficiency has been one of the most dominant themes in finance research. Challenging the claims of many well-known studies on market efficiency (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 Analysis of cryptocurrency markets 1 On extreme value theory in the presence of technical trend: Pre and Post Covid-19 analysis of cryptocurrency markets ...
... Over the past many decades, market efficiency has been one of the most dominant themes in finance research. 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. ...
... 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.
... 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. ...
... We use the same study techniques of De Bondt and Thaler (1987), Zarowin (1990) and Clare and Thomas (1995) to test our overreaction hypothesis in the Indian market. The prior period performance of the stocks guides portfolio formation. ...
... where R pmt is the loser or winner excess return or cumulative excess return in month t, and D = 0, 1 dummy variable; D = 0 for inners and 1 for losers, and ε jmt is the white noise error term. Differences in market risks (beta) between winners and losers explain the superior performance of losers over winners (Clare and Thomas, 1995). Hence, instead of merely comparing the means of the returns of the loser and the winner stocks, following Zarowin, (1990), we regress the excess returns against the market risk premium, the implication of which is that the winner-loser effect, once we get the risk estimates during the period. ...
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.
... 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. ...
... We use the same study techniques of De Bondt and Thaler (1987), Zarowin (1990) and Clare and Thomas (1995) to test our overreaction hypothesis in the Indian market. The prior period performance of the stocks guides portfolio formation. ...
... where Rpmt is the loser or winner excess return or cumulative excess return in month t, and D = 0, 1 dummy variable; D = 0 for inners and 1 for losers, and εjmt is the white noise error term. Differences in market risks (beta) between winners and losers explain the superior performance of losers over winners (Clare and Thomas, 1995). Hence, instead of merely comparing the means of the returns of the loser and the winner stocks, following Zarowin, (1990), we regress the excess returns against the market risk premium, the implication of which is that the winner-loser effect, once we get the risk estimates during the period. ...
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.
... On the other hand, momentum strategies led by Jegadeesh and Titman (1993) found that a strategy bought the past six-month's winners and sold the past losers earned approximately 1 per cent per month over the subsequent six months. Clare and Thomas (1995), using UK data from 1955 to 1990, found that past losers earned 1.7 per cent per annum more than past winners. They further suggested that losers tended to be small, and that the limited overreaction effects documented were probably due to the size effect. ...
... The methodology for testing the overreaction hypothesis, first proposed by De Bondt and Thaler (1985), is indeed a standard event study technique which was further elaborated by Clare and Thomas (1995). The present study follows the latter methodology to investigate the return reversal in the Indian equity market during the period from July 1990 to July 2012. ...
... A significant and positive value for 1 a can be seen as confirmation of the overreaction hypothesis, that is, Asia-Pacific Journal of Management Research and Innovation, 10, 4 (2014): 355-366 the loser stocks outperform the winner stocks in terms of the average performance. 5. Zarowin (1990) and Clare and Thomas (1995) proposed the systematic risk difference as a possible cause of the differential returns between the winner and loser stocks. In order to test this, -R D has been regressed against the market risk premium in following manner: ...
The purpose of this study is to examine the overreaction hypothesis in the Indian stock market during the period 1990 to 2012. It also explores whether this overreaction hypothesis is the manifestation of earlier anomalies such as size effect and value effect. The stock price and fundamental data of 1,427 Indian firms listed on the Bombay Stock Exchange during the period 1990 to 2012 have been used. Time series regression and CAPM have been applied to test overreaction, size and value effects. The empirical results suggest that past losers have a tendency to outperform past winners for longer investment periods such as two to three years. Although lower in magnitude, yet this superior performance of loser stocks is economically significant in the Indian equity market. The empirical results do not reveal any calendar anomaly in the superior performance of loser stocks. Furthermore, the results indicate that losers tended to be small and value stocks and that the limited overreaction effects documented are probably attributable to the size and value effect in the Indian equity market during the last two decades. The findings may provide a base for investment managers and investors to reallocate their portfolio weights to small and value stocks. Earlier studies in the Indian context were primarily focused only on the overreaction hypothesis and to cover this research gap, a further dig has been made to uproot the possibility of size effect, value effect and seasonality in overreaction effects. A fairly large sample (1,427 firms) has been used as compared to previous studies.
... The technique for evaluating return-based investment strategies was firstly introduced by DeBondt and Thaler (1985). Initially, it was a traditional method of event study analysis; further, Jegadeesh and Titman (1993) and Clare and Thomas (1995) advanced this methodology. This study follows these methodologies to examine the investment performance of momentum strategies in the Indian stock market from July 2005 to December 2019. ...
... Many studies by Zarowin (1990) and Clare and Thomas (1995) supported the notion that the systematic risk difference may cause differential returns between the winner and loser stocks. Further, some studies advocate that the stock market anomalies such as momentum profits may be compensated for the risk proxies measured by various asset pricing models. ...
The present study examines the momentum profitability and its sources in the Indian equity market while using the capital asset pricing model firstly and then the Fama-French three-factor pricing model. The empirical results reveal significant momentum profitability in the Indian equity market for short to medium-term holding periods such as 3 to 9 months. Further, empirical results indicate a significant difference between the profitability ratios of the winner and loser stocks in the Indian equity market. The present study documents that the Fama-French three-factor model is superior to the capital asset pricing model in explaining the momentum profitability in the Indian context.
... 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.
... The higher the fluctuation in stock prices, the greater would be the deviation from fundamental values and the higher the adjustment time where prices revert to their original values. The overreaction effect has been confirmed in developed countries like the UK (Clare and Thomas, 1995), Spain (Alonso and Rubio, 1990), New Zealand (Bowman and Iverson, 1998) and Germany (Lobe and Rieks, 2011), with a variety of formation and testing periods. Researchers also focused on short-run overreaction (daily and weekly data from a one-week testing period) (Ahmed and Hussain, 2001;Bowman and Iverson, 1998) whereas others use more extended testing periods of one or two years (Daniel and Hirshleifer, 1998). ...
... However, Brailsford (1992) for Australia and Kryzanowski and Zhang (1992) for Canada found weak evidence of the overreaction effect with one, two, three, five and eight years testing and formation periods. Similarly, Clare and Thomas (1995) found weak overreaction effect in the stock market of the UK from 1955 to 1990, and these abnormal returns were due to the size effect. Richards (1997) using total returns of sixteen market indices of loser and winner portfolios examined common international risk factors that were well integrated into the markets. ...
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.
... Di pasar modal internasional, overreaction dijumpai juga di pasar modal Spanyol (Alonso & Rubio, 1990), pasar modal Brazil (Da Costa, 1994 dan Inggris (Clare & Thomas, 1995). Namun demikian, belum banyak penelitan serupa yang dilakukan di pasar modal Indonesia. ...
... Rata-rata abnormal return saham loser turun menjadi -2,32%, hal ini menunjukkan bahwa return saham loser 2,32 persen lebih rendah daripada return pasar. Fakta yang ditemukan dalam penelitian ini serupa dengan penelitian Kryzanowsky dan Zhang (1992) dengan menggunakan data pasar Toronto yang tidak menemukan perilaku pembalikan, namun berbeda dengan yang ditemukan oleh DBT (1985) di pasar modal AS, Alonso & Rubio (1990) di Spanyol, Da Costa (1994 di Brazil, dan Clare & Thomas (1995) di Inggris, begitu juga dengan penelitian di Indonesia oleh Rahmawati dan Suryani (2005). DBT (1985) menemukan bahwa saham-saham winner atau loser selama periode tertentu akan mengalami pembalikan return pada periode berikutnya atau saham loser akan mengungguli saham winner. ...
The goal of this research is to test the existence of winner-loser anomaly based on overreaction hypothesis, specifically to investigate the profitability of contrarian investment strategy in Indonesia Stock Exchange (IDX) by observing a sample of the firm listed at Jakarta Islamic Index (JII). For examining the presence of contrarian in prices, the research used a variable of excess return from January 2004 to December 2009, and respectively six months formation and test period. The analysis found that overreaction didn't occur in the capital market, and there wasn't strong evidence for price contrarian of past winners and losers in IDX. On the other word, contrarian investment strategy did not obtain significant profit for long-term horizon (thirty six months). If contrarian returns in United States and European markets were due to overreaction to information contained in past prices, this research found different behavioral phenomenon in the Indonesian capital market.
... The positive news sent the stock price skyrocketing well above its fundamental value, but investors realized their mistakes and corrected their actions, causing the price to reverse course (Dhankar, 2019). Past studies suggest that winning companies experience negative AR because of the euphoria surrounding them, which causes investors to overpay (Brammer, Brooks & Pavelin, 2009;Chen & De Bondt, 2004;Clare & Thomas, 1995). In addition, negative AR and CAR can occur because investors liquidate their securities as a result of stock surges, resulting in falling prices (Dhankar, 2019). ...
The global success of the K-pop music industry impacts the investment climate of the entertainment industry in the South Korean stock market. One of the driving factors attracting investors is the awards obtained by the K-pop idols. Hence, this event study investigates whether idols’ receiving awards creates stock abnormal returns (ARs) and cumulative abnormal returns (CARs). We collected five-day stock price data surrounding the events from 2018 to 2019 for the four entertainment companies. Using mean difference tests, we analyzed the movements of the stock returns. Our results show the appearance of positive and negative ARs dan CARs, indicating that investors react differently to the information contained in award announcements. This implies a deviance from the efficient market hypothesis and that investors behave irrationally whom investment decision affects the market. For this reason, companies should select awards when involving their idols.
... 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).
... Contrary to the findings of De Bondt and Thaler (1987), the author argues that this result was due to the size of the portfolios; loser portfolios are smaller than winner portfolios, and thus, the returns were not the result of investor overreaction. Similar evidence is given by Clare and Thomas (1995) who investigated the market overreaction hypothesis for the U.K. using monthly stock returns data over the period from 1955 to 1990. Further, Baytas and Cakici (1999) investigated the overreaction hypothesis for seven developed stock markets (the U.S., Canadian, the U.K., Japanese, German, French and Italian stock markets) using stock returns for the period between 1982 and 1991. ...
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.
... If investors realize they have overreacted, their correction can cause a price reversal [54]. The same phenomenon regarding price reversal because investors know they have overreacted also found in several studies [49,54,55]. Investors' overreaction in the capital market can occur over a long or short time [56,57]. ...
The objectives of this study are to analyze the market response by: (a) examining the consequences of the domestic market obligation (DMO) on coal prices policy on the difference in abnormal return (AR) prior to and after the announcement; (b) determine the effect of DMO policy announcements on coal prices on trading volume activity (TVA). This research examined daily stock returns on the shares of 19 coal companies listed on the Stock Exchange in 2018, ten days before and after the DMO announcement (February 23 to March 23, 2018). Statistical analysis was used to calculate the average abnormal return (AAR) and trading volume activity (TVA). The results showed that the announcement of domestic market obligation (DMO) received a negative response from the market. This study also found that the abnormal return was negative eight days before the DMO announcement. This study also finds the cause of overreaction in the short term, namely a significant price reversal process immediately after the announcement of the DMO. The paired sample t-test found an insignificant difference in abnormal returns after or before the announcement of the DMO on coal prices policy on companies listed on the IDX for the 2018 period. While testing the TVA, a significant difference was found before and after the announcement of the coal DMO selling price policy.
... (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 ...
... In case of other anomalies like value (price-to-book value) and profitability (return on equity), the reaction of investors to new accounting-based information could be different in HIG and LIG markets. Many LIG markets are also emerging markets, which are more sentiment-driven and investors may be prone to an overreaction (Ahmad & Hussain, 2001;Tripathi & Gupta, 2009;Wu, 2011) to accounting-based information leading to higher premiums, unlike the more mature markets (Clare & Thomas, 1995). ...
We examine prominent market anomalies and evaluate the efficacy of alternative asset pricing models under different financial integration settings. A financial integration index is developed for classifying 25 sample markets into high-, medium- and low integration groups. Size is found to be the strongest anomaly in world markets, followed by value and liquidity. Value and profitability effects are larger for low-integrated markets. Highly integrated markets experience short-term momentum while many low-integrated markets exhibit mild reversals. Fama and French five-factor model outperforms capita l asset pricing model (CAPM) and Fama and French three-factor model in explaining returns. International factors augment the role of local factors for more integrated markets. Our study has implications for global investors to design anomaly based investment strategies.
... Kato (1990,) who examined the contrarian anomaly in the Japanese capital markets by using stock return data from 1952 to 1989, stated that abnormal returns can be obtained with the contrarian strategy in the Japanese capital markets. Clare and Thomas (1995) investigated the contrarian anomaly in the UK market in their study. As a result of the analysis carried out using the monthly returns between 1955 and 1990, they found that the portfolio created with losing stocks yielded 1.7% more annually than the portfolio created with the winning stocks in the following test period. ...
Editörler : Doç. Dr. Mustafa Batuhan Kurt, Ayşe Çatalcalı Ceylan, Zafer Özomay
... Malkiel and Cragg (1970) studied the effects of historical growth of earnings, dividend payout ratio and the stock's rate of return relative to the market in determining PE. Bernard and Thomas (1990) and Clare and Thomas (1995) were also used similar methodology to estimate the P/E ratio for a given set of fundamentals. ...
The Information Technology (IT) industry is the key part of India's
economy and its activities extend all segments, including Agriculture,
Manufacturing and Services, of the entire world. The core competencies and
strength of Indian IT Industry have been gaining significant investment
focus across the globe for a couple of decades. However, industry factors
can make only part explanations for the variations in investment returns.
Many studies have already found the dominance of the firm level factors in
influencing investors' fortunes. Company analysis encompasses the analysis
of all those factors unique to the performance of a firm that potentially
impacts the value of investments at the market place.
Although many books have been written on Company Analysis, this book
stands out in terms of its scope and content. This book is written primarily
for the scholars who are in pursuit of academic or practical research on
investment finance. According to my best of knowledge, this is the first
book on 'Company Analysis of Indian IT Industry' which has been written
with an investment valuation focus. It expects to provide an easy access to
the main theoretical as well as empirical concepts of investment finance.
The book is an extract of the academic research undertook by the Author
and brings out the important concepts of company analysis in a very simple
and lucid manner with 32 case studies of Indian IT firms. Thus, the book is
intended to provide a comprehensive presentation of real investment
research and the readers would find it rather a reference book than a text
book.
The book is designed into six Chapters with the first Chapter providing an
introduction on investment in securities along with a discussion on the
different approaches to investment valuation. Chapter 2 gives some
glimpses of Indian IT industry and its structure and competitiveness. The
theories and empirics on Company anlysis along with a description on
theoretical framework of accounting ratios and its use are detailed in
Chapter 3. Chapter 4 assesses the financial conditions of 32 publicly listed
IT firms in India and Chapter 5 investigates the empirical validity on the use
of firms' financials in making successful stock investments in India. Finally
the last chapter, Chapter 7 is set apart for the summary of findings and
conclusions of the study.
I am deeply indebted to Dr. S. Harikumar, Professor, Department of Applied
Economics, Cochin University of Science and Technology for his
intellectual insights that helped me a lot in my research and writings. I am
most sincere and earnest in expressing my heartfelt gratitude towards the
Director, Department of Collegiate Education, Kerala and Principal,
Government College, Thrissur for their motivation and for approving and
providing financial aid for the publication of this book. I acknowledge the
valuable helps and guidance offered by my friends and colleagues in the
department and office staff of who all had been somehow or other
instrumental in bringing out this book.
I keenly look forward to receive your views, observations, comments,
constructive criticisms and suggestions for further improvements at
sajthazhungal@gmail.com, for which I would be highly grateful.
... Kato (1990,) who examined the contrarian anomaly in the Japanese capital markets by using stock return data from 1952 to 1989, stated that abnormal returns can be obtained with the contrarian strategy in the Japanese capital markets. Clare and Thomas (1995) investigated the contrarian anomaly in the UK market in their study. As a result of the analysis carried out using the monthly returns between 1955 and 1990, they found that the portfolio created with losing stocks yielded 1.7% more annually than the portfolio created with the winning stocks in the following test period. ...
In this study, we investigate momentum and contrarian anomalies in Islamic equity markets using weekly data for the period from 2011M1 to 2020M3 of QISMUT countries (Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, and Turkey). We apply the serial correlation method with a fixed-length rolling windows approach to determine momentum and contrarian anomalies in QISMUT countries’ Islamic stock indices. We find that there are both momentum and contrarian anomalies in the Islamic equity markets of QISMUT countries except Malaysia and that the performance of momentum and contrarian investment strategies differs from country to country and from time to time. We also find that abnormal returns can be obtained with the momentum strategy in Islamic equity markets of Qatar and the United Arab Emirates, while abnormal returns can be achieved in the Islamic equity markets of Indonesia, Saudi Arabia, and Turkey with the contrarian strategy. These results will provide important information for individual and institutional investors, portfolio managers, decisionmakers, and other market participants.
... Kato (1990,) who examined the contrarian anomaly in the Japanese capital markets by using stock return data from 1952 to 1989, stated that abnormal returns can be obtained with the contrarian strategy in the Japanese capital markets. Clare and Thomas (1995) investigated the contrarian anomaly in the UK market in their study. As a result of the analysis carried out using the monthly returns between 1955 and 1990, they found that the portfolio created with losing stocks yielded 1.7% more annually than the portfolio created with the winning stocks in the following test period. ...
... The reported estimates are in accordance with both our expectations and the theory behind the financial instability hypothesis (Minsky, 1977), diagnostic expectations (Bordalo et al., 2018), and with the overreaction hypothesis from the literature on stock prices (De Bondt and Thaler, 1987;Clare and Thomas, 1995). In good times, households tend to overestimate the persistence of a positive economic situation into the future and then, based on the optimistic prospects, take on more debt than would be rational. ...
We examine whether household sentiment can explain fluctuations in newly issued consumer loans. We construct a novel measure of household sentiment using detailed data from the harmonized consumer surveys conducted in European countries. We differentiate between rational sentiment, which mimics dynamics in macroeconomic fundamentals, and irrational sentiment, which proxies households' optimism/pessimism on top of their rationally sourced beliefs. We show that shocks to the sentiment of households do have a measurable impact on growth of consumer loans. Specifically, we assert a significantly positive role of irrational sentiment on top of the economic fundamentals identified in the literature. Moreover, a closer examination reveals that the studied relationship is not symmetric over the business cycle-the effect of irrational sentiment is present only in periods in which a country's output is well above its potential.
... Clare ve Thomas (1995Thomas ( ), 1955Thomas ( -1990 dönemi Londra borsasında kâr dağıtımına göre düzeltilmiş hisse senedi getirileri üzerinden yaptıkları çalışmalarında, önceden kaybeden portföy performanslarının, önceden kazanan portföy performanslarından daha iyi olduğunu tespit etmişlerdir. Gaunt (2000), Avustralya hisse senedi piyasasında Aşırı Tepki Hipotezini 1974-1997 dönemi için risk, büyüklük ve diğer başka faktörler açısından incelemiş, çalışma sonucunda hipotezi destekler sonuçlara ulaşamamıştır. ...
Çalışmada, BİST Ulusal 100 endeksinde Aşırı Tepki Hipotezinin geçerli olup olmadığı araştırılmıştır. Endekste yer alan ve sürekli olarak işlem gören hisselerin 2003-2018 yılları arasında aylık ve üçer aylık dönemlerde anormal getirileri hesaplanmış, hisselerin kümülatif anormal getirileri kullanılarak yıllık ve iki yıllık dönemlerde kazandıran ve kaybettiren portföyler oluşturulmuş, ardından bu portföylerin bir sonraki test dönemine ait performansları incelenmiştir. Ayrıca BİST Ulusal 100 endeksinde yer alan ve 2002-2016 yılları arasında verileri eksiksiz temin edilebilmiş 54 şirket üzerinden bir portföy oluşturulmuş ve bu portföyün üçer aylık dönemlerde ortalama anormal getirileri ve ortalama Piyasa Değeri / Defter Değeri oranları arasındaki etkileşim üzerinden Aşırı Tepki Hipotezinin geçerliliğine ilişkin kanıtlar aranmıştır. Gerçekleştirilen araştırmalar ve incelemeler sonucunda BİST Ulusal 100 endeksinde Aşırı Tepki Hipotezinin geçerliliğini destekleyen bulgulara ulaşılmıştır.
... When value-weighted returns were used, the reversals shrank and became statistically unreliable, suggesting that this phenomenon is limited to small firms. Clare and Thomas (1995) found similar evidence for the United Kingdom (UK) stock market. Losers tended to be small, and the limited overreaction effects would probably translate the risk premiu of small size firms. ...
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.
... Further studies (Jegadeesh and Titman 1993;Ferri and Min 1996;Poteshman 2001;Lobe and Rieks 2010) analyzed abnormal returns in different markets, assets, periods, data frequencies and reached similar conclusions, namely that there are price reversals after abnormal price changes (Bremer and Sweeny 1991;Clare and Thomas 1995;Giannetti et al. 2006;Mynhardt and Plastun 2013;. Price reversals after abnormal returns are detected in different stock markets: USA (Brown et al. 1988;Larson and Madura 2003;Clements et al. 2009), Japanese (Chang et al. 1995), Canadian (Kryzanowski and Zhang 1992), Ukrainian (Mynhardt and Plastun 2013), and many others. ...
This paper examines whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. For this purpose, a number of hypotheses of interest are tested for the Bitcoin, Ethereum and Litecoin exchange rates vis-à-vis the US dollar over the period 01.01.2015–01.09.2019, specifically whether or not: (H1) the intraday behavior of hourly returns is different on abnormal days compared to normal days; (H2) there is a momentum effect on days with abnormal returns, and (H3) after one-day abnormal returns. The methods used for the analysis include various statistical methods as well as a trading simulation approach. The results suggest that hourly returns during the day of positive/negative abnormal returns are significantly higher/lower than those during the average positive/negative day. The presence of abnormal returns can usually be detected before the day ends by estimating specific timing parameters. Prices tend to move in the direction of the abnormal returns till the end of the day when it occurs, which implies the existence of a momentum effect on that day giving rise to exploitable profit opportunities. This effect (together with profit opportunities) is also observed on the following day. In two cases (BTCUSD positive abnormal returns and ETHUSD negative abnormal returns), a contrarian effect is detected instead.
... Other studies document its robustness by testing other financial markets, overreaction durations and financial instruments. First, the overreaction hypothesis is validated independent of the location of the financial market as it has been documented for Australia (Brailsford, 1992), Brazil (Da Costa, 1994, China (Wang et al., 2004), Greece (Antoniou et al., 2005), Hong Kong (Akhigbe et al., 1998), Japan (Chang et al., 1995;Bremer et al., 2006), New Zealand (Bowman and Iverson, 2002), Spain (Alonso and Rubio, 1990), Turkey (Vardar and Okan, 2008), the UK (Clare and Thomas, 1995), Ukraine (Mynhardt and Plastun, 2013) and across several different international markets (Blackburn and Cakici, 2017). Second, the presence of an overreaction is not limited to a specific duration. ...
This paper examines the prevalence of price overreactions for twelve cryptocurrencies compared to the US stock market. For this purpose, we implement a dynamic modeling approach to define and test for overreactions for interday and various intraday price levels. We find evidence that price overreactions are highly prevalent in the cryptocurrency market for all frequencies, strongly supporting the overreaction hypothesis. This result is largely comparable for cryptocurrency and stock markets despite the fact that both markets are fundamentally different. However, the returns of an overreaction trading strategy are significantly higher for cryptocurrencies due to larger overreactions as the most important factor for profitability. In addition, our results also show that negative overreactions are slightly more prevalent than positive overreactions.
... Based on the cognitive psychology realm, in a breakthrough study, De Bondt and Thaler (1985) constructing "winner" and "loser" portfolios found an efficient market anomaly: the stock market overreacted to the extend that "losers" become "winners" and vice versa within their testing period. Using a similar procedure of that of De Bondt and Thaler (1985), Clare and Thomas (1995), using data from UK, find that losers outperform previous winners over a two year period by 1.7% per annum. In contrast, in a theoretical paper, Daniel, Hirshleifer and Subrahmanyam (1998) demonstrate that investors tend to overreact to private information signals and under-react to public information signals. ...
p>The objective of this work is to test the overreaction hypothesis in the Mexican Stock Market for the period of 2002-2015, using monthly data and applying the Cumulative Average Residuals (CAR) methodology via the CAPM model and the three-factor model proposed by Fama and French. The CAR model is applied to test how winner and loser portfolios perform during the period under analysis. Overall, the evidence shows that average CAR for the loser portfolio is 0.706%, whereas CAR for the winner portfolio is 0.364%, and that are statistically different; nevertheless, both portfolios are co-integrated. This research contributes to the financial literature identifying overreaction in the Mexican Stock Market during the period examined.</p
... They report a negative relationship between the rate of the stock return and time series for 12 months of the stock examining period, which shows stock return reversal effect in the UK markets. However, Clare and Thomas (1995) find no return reversal effect in UK market. Later on, Arnold and Baker (2007) witness a systematic longterm reversal of share returns for firms listed on the London Stock Exchange over the period 1960-2002. ...
Purpose
The existing literature about return reversal effect in Chinese stock markets is inconclusive and controversial. Therefore, the purpose of this paper is to investigate the presence of return reversal effect in the Shanghai A stock market.
Design/methodology/approach
The authors used the late-stage contrarian strategy of Malin and Bornholt (2013) for the period March 2011‒March 2016.
Findings
The results show that there is a long-term return reversal effect in the Shanghai A stock market for the period March 2011‒March 2016. When portfolios are in the formation period ( P =24 months), the excess returns are significant in the holding period, Q =6, 9, 12, 24 months. Further, there is also a significant short-term momentum effect in the Shanghai A stock market. For the robustness check, a new reversal factor was introduced into the Fama‒French three-factor model. Results show that portfolios have a smaller size and have lower book-to-market ratios; the return reversal factor explains a portion of the abnormal returns and coefficient of the reversal effect is significant.
Research limitations/implications
The authors caution readers from generalizing the findings of this study, as the sample is small and the focus is only on A stocks listed on the Shanghai Stock Exchange.
Originality/value
The present research expands the current literature by providing a comprehensive information about the presence of the long-term and short-term return reversal effects in Shanghai A stock market. Furthermore, the Chinese stock markets have distinctive features in comparison to the developed stock markets in terms of government control, institutional structure, liquidity, cultural background, etc. Such differences affect the pattern in stock returns compared with those observed in developed stock markets. Contrary to previous studies, the present study also accounts for robustness checks. Finally, it also evaluates the possible reasons for the return reversal effect in the Shanghai market.
... Clements et al. (2009) report that the overreaction anomaly has not only persisted but in fact increased over the last twenty years. Its existence has been documented in several studies for different markets and frequencies such as monthly, weekly or daily data (see, e.g., Bremer and Sweeney 1991;Clare and Thomas 1995;Larson and Madura 2003;Mynhardt and Plastun 2013;Caporale et al. 2018). ...
This paper examines long-term price overreactions in various financial markets (commodities, US stock market and FOREX). First, a number of statistical tests are carried out for overreactions as a statistical phenomenon. Second, a trading robot approach is applied to test the profitability of two alternative strategies, one based on the classical overreaction anomaly, the other on a so-called “inertia anomaly”. Both weekly and monthly data are used. Evidence of anomalies is found predominantly in the case of weekly data. In the majority of cases strategies based on overreaction anomalies are not profitable, and therefore the latter cannot be seen as inconsistent with the EMH.
... To calculate the profitability factor (CMA-conservative minus aggressive), operating profit (WC01250) minus dividends paid (WC04551), is used. Clare and Thomas (1995) claim that the portfolios are a better option when the marketbased information is available. In this study, the size effect is examined which is market-based information that is why size-based portfolios are constructed. ...
There is extensive international evidence that size effect yields positive abnormal returns for long-term periods. However, this topic has received scarce attention in Pakistan. This research study examines the Size anomaly on Karachi Stock Exchange (KSE) for a period of 2000-2015. The result shows that the partial difference between extreme decile portfolios (P1-P10) generates abnormal returns of 7.67% p.a. and is 11.81% p.a. for both the value-weighted (VW) and equally-weighted size-sorted portfolio respectively. Further, a system of equations based on Generalised Methods of Moments (GMM) showed that Capital Asset Pricing Model (CAPM) is misspecified in the case of KSE as it fails to explain the cross-sectional variation in portfolios returns based on market capitalization of companies but 3-factor and 5-factor Fama and French models (1996, 2015) provide evidence in favour of additional risk factors in CAPM framework to explain the risk-adjusted abnormal return of size-sorted portfolios.
... Similar evidence has been documented for the Asia-Pacific markets such as Japan (Chan et al., 1991), Korea (Mukherji et al., 1997) and New Zealand (Vos and Pepper, 1997). Some researchers argue that the large positive abnormal returns generated by contrarian strategy can be attributable to this well-known size effect (see Zarowin, 1990; Clare and Thomas, 1995, respectively for the US and the UK evidence). For this reason, there is a tendency among many momentum/contrarian studies to examine whether the returns earned are attenuated by the small firm effect. ...
Purpose
The purpose of this paper is to examine the profitability of return‐based investment strategies in the New Zealand stock market; 16 such strategies are examined for the period from January 1995 to December 2004.
Design/methodology/approach
The paper shows that, at the end of each month of the sample period, every security is ranked in ascending order using their past J ‐month formation period cumulative return ( J =3, 6, 9 and 12). Then these securities are allocated to three groups; group 1 represents the loser portfolio, while group 3 represents the winner portfolio. Finally, equally weighted average returns of winner and loser portfolios are calculated over the next K ‐month holding period ( K =3, 6, 9, and 12). The statistical significance of the returns earned from buying winners and shorting losers is tested in order to determine the profitability of proposed strategies.
Findings
The findings in this paper show that a strong momentum effect, rather than a reversal effect, is present in this market. For example, the strategy, which is based on a six‐month portfolio formation period and a six‐month holding period, generates a monthly return of 1.14 per cent. These strategies are most profitable when they are based on formation and holding periods of three‐to‐six months. Further analyses reveal that the profits generated by such investment strategies cannot be explained by either the small firm effect or the January effect.
Originality/value
The main implication of this paper shows that buying past winners and selling past losers is profitable in the short to medium run in New Zealand.
... He interprets this to be evidence of the small firm effect, not the overreaction hypothesis. Clare and Thomas (1995) review UK data that shows long run mean reversion, but this disappears when firm size is controlled for. ...
... Conrad and Kaul (1993) claim that measurement errors as well as microstructure biases of the market such as price discreteness, bid-ask bounce and non-synchronous trading causes short term contrarian profits. In UK Clare and Thomas (1995) determine that the overreaction effect is subsumed by the size effect. The behavioral paradigm purports that psychological biases such as herding Kang, Liu and Ni (2002) overreaction Bondt and Thaler (1985) following the contrarian strategy. ...
Purpose: There is extensive international evidence that contrarian strategy yields positive abnormal returns for long-term periods. However, this topic has received scarce attention in Pakistan. This research study in line with De Bondt and Thaler (1985) examines the winner-loser anomaly on Karachi Stock Exchange (KSE) using cumulative abnormal returns (CAR). Design/Methodology: To substantiate the purpose, this study has calculated cumulative abnormal returns (CAR) of each company listed on KSE for a period of 2000-2015 and constructed both the corresponding Equally Weighted and Value Weighted portfolios returns. To check the risk adjusted performance of these portfolios, a system-based estimation via the Generalized method of moments (GMM) with Newey-West standard errors corrected for heteroscedasticity and serial correlation is employed. Findings: This study reports significant evidence of Contrarian Investment strategies in KSE over the entire sample period. Results show that both Equally Weighted and Value Weighted portfolios formed on CAR generates abnormal returns of 9.89% and 3.64% per annum in the long run on KSE. Further a system of equations based on Generalized Methods of Moments (GMM) showed that Capital Asset Pricing Model (CAPM) is misspecified in case of KSE as it fails to explain the cross-sectional variation in portfolios returns based on contrarian investment strategies but 3-factor and 5-factor (Fama and French, 1996;2016) have explained their risk-adjusted abnormal return. Research Limitation/Implications: The study can be improvised by including other fundamentals and macroeconomic variables and determining their impact on contrarian investment strategies in different sectors and markets of Pakistan. Practical Implications: Policymakers and Investors need to take in to account contrarian investment strategies for evaluating asset returns. Contrarian Investment strategies are profitable in the long run on KSE and investors when taking their portfolio selection decisions can long the portfolios with lowest CAR value shares and short the higher CAR values portfolios. Originality/Value: The study aims to make the first attempt in investigating the risk adjusted performance of portfolios based on contrarian strategies by using not only CAPM but also 3-factor and 5-factor Fama and French (1996;2016) on Karachi Stock exchange.
... In subsequent studies, Jegadeesh (1990) and Lehman (1990) find that contrarian strategies are also profitable for short-term horizons. Zarowin (1990) argues however, that losers outperform winners in the US only due to their smaller size, a finding confirmed by Clare and Thomas (1995) for the UK. Conrad and Kaul (1993) suggest an explanation of the overreaction hypothesis that rests on computational and other biases, while Chan (1988) and Ball and Kothari (1989) argue that the anomaly is due to changes in the equilibrium required returns, for which DeBondt and Thaler (1985) did not control. ...
This paper investigates the existence of contrarian profits and their sources for the Athens Stock Exchange (ASE). The empirical analysis decomposes contrarian profits to sources due to common factor reactions, overreaction to firm-specific information, and profits not related to the previous two terms, as suggested by Jegadeesh and Titman (1995). Furthermore, in view of recent evidence that common stock returns are related to firm characteristics such as size and book-to-market equity, the paper decomposes contrarian profits to sources due to factors derived from the Fama and French (1993, 1996) three-factor model. For the empirical testing, size-sorted sub-samples that are rebalanced annually are employed, and in addition, adjustments for thin and infrequent trading are made to the data. The results indicate that serial correlation is present in equity returns and that it leads to significant short-run contrarian profits that persist even after we adjust for market frictions. Consistent with findings for the US market, contrarian profits decline as one moves from small stocks to large stocks, but only when market frictions are considered. Furthermore, the contribution to contrarian profits due to the overreaction to the firm-specific component appears larger than the underreaction to the common factors.
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.
The study examines the behavior of stock prices after large price changes. It further examines the effect of firm size on stock returns, and the presence of the disposition effect. The study employs the event study methodology using daily price data from Pakistan Stock Exchange (PSX) for the period January 2001 to July 2012. Furthermore, to examine the factors that explain stock price behavior after large price movements, the study employs a two-way fixed-effect model that allows for the analysis of unobservable company and time fixed effects that explain market reversals or continuation. The findings suggest that winners perform better than losers after experiencing large price shocks thus showing a momentum behavior. In addition, the winners remain the winner, while the losers continue to lose more. This suggests that most of the investors in PSX behave rationally. Further, the study finds no evidence of disposition effect in PSX. The investors underreact to new information and the prices continue to move in the direction of initial change. The pooled regression estimates show that firm size is positively related to post-event abnormal returns while the fixed-effect model reveals the presence of unobservable firm-specific and time-specific effects that account for price continuation.
The purpose of the article is to analyze the relevance of earnings fundamentals in predicting extreme price reversals of an emerging stock market. We collect monthly price data on six sector indices from Bombay Stock Exchange (BSE) of India for the period 2004–2019. The research decomposes industry stock returns into Potential Maximum Gains (PMG) and Potential Maximum Losses (PML) with price extremes at first and then tests price reversal behavior using Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) and vector autoregressive (VAR) models. The study finds symmetry between PMG and PML in the banking, realty, and oil sectors, while the asymmetric reversal behavior is noted in the automobiles and capital goods industries. The presence of industry fundamentals in the models estimating the reversal behavior of share prices enhances their predictive power, which suggests the significance of value strategies in making gains from extreme price variations. The price reversal behavior is sector specific and found inconsistent in emerging market. Hence, the investors cannot overlook the relevance of the industry characteristics and earnings fundamentals while predicting the stock price behavior in emerging markets.
This paper uses the Johansen cointegration test and the Vector Error Correction Model
(VECM) to study the impact of fiscal and monetary policy on economy growth in Vietnam
during the period from quarter I/2004 to quarter II/2013. The results showed the cointegration relation between the macroeconomic policies and economic growth. Besides, the variance decomposition and impulse response functions from VECM model showed the impact of the two policies on economic growth were limited, in which the impact of the monetary policy on growth is greater than that of the fiscal policy on growth. Subsequently, the paper provides some recommendations to improve the efficiency of the implementation of these policies in Vietnam.
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.
Overreaction effect can be traced back to 1980s when DeBondt and Thaler (The Journal of Finance XL:793–805, 1985) argued that there existed a strong tendency for both low- and high-performing securities in one period to experience a reversal in the following years. Since then, it has become one of the grey areas in finance and leads to an ongoing debate on its existence. The study critically evaluates the work of various authors discussing the possible causes of the effect and its behavioural aspects.
In this paper, we propose an extreme Granger causality analysis model to uncover the causal links between crude oil and BRICS stock markets. Instead of analyzing the average causal relationship, as is usually done, we first decompose the data into three cumulative components and investigate the causality between different combinations of extreme positive, extreme negative and normal shocks. These types of combinations can describe all facets of the interactions between crude oil and BRICS stock markets, especially under extreme shocks. In contrast to the results obtained by the traditional Granger causality test, our empirical findings demonstrate that the effect of oil price changes on the stock markets is stronger under extreme circumstances than under normal circumstances. Furthermore, large upward or downward oil price changes have an asymmetric impact on extreme upward or downward stock price changes. Finally, robustness checks verify the rationality and validity of the extreme Granger causality analysis.
A stock exchange is an exchange where stock brokers and traders can buy and sell shares of stock, bonds, and other securities. Many large companies have their stocks listed on a stock exchange. This makes the stock more liquid and thus more attractive to many investors. Some large companies will have their stock listed on more than one exchange in different countries, so as to attract international investors. Participants in the stock market range from small individual stock investors to large trader investors, who can be based anywhere in the world, and may include banks, insurance companies, pension funds and hedge funds. Their buy or sell orders may be executed on their behalf by a stock exchange broker.
Cambridge Core - Econometrics and Mathematical Methods - Introductory Econometrics for Finance - by Chris Brooks
This study reviews previous research on the contrarian investment strategy as first analyzed by De Bondt and Thaler (1985), and aims at deepening and complementing the existing research on the subject. The paper analyses the results of applying the strategy to NASDAQ OMX Vilnius stocks over the period 2003–2010, dividing the testing into two groups: prior to the economic crisis and the crisis periods, based on the movement of the OMXV index. The method uses holding period returns in evaluating the standard contrarian investment strategy. The paper explains the methodology in detail and presents the findings which show no considerable holding period returns from the strategy in NASDAQ OMX Vilnius during the decline period; however, contrarian strategy seems to be a better option than a standard market index based portfolio during the periods of rapid growth when stocks are overrated.
Stock price overreaction seems always regarded as an essential issue in recent decades. Due to big data concerns, this study explores whether investors can make profits by trading the constituent stocks of DJ30, FTSE100, and SSE50 as stochastic oscillator indicator (SOI) staying in diverse overreaction zones including overbought and oversold, stricter overbought and oversold, and extreme overbought and oversold zones for consecutive days. Although we argue that the SOI staying in overreaction zones for consecutive days is often appeared in the real world, this issue, to our knowledge, seems unexplored in the existing literature. Results show that momentum strategies are appropriate for holding these stocks in the long run as the SOI staying in overbought zones, whereas contrarian strategies are proper for holding these stocks in the short run as the SOI staying in oversold zones. These revealed results may be beneficial for investors to trade these stocks as the SOI staying in overreaction zones for consecutive days.
While the momentum strategy assumes the continuation of the price movement, the reversal strategies rely on a contrary assumption: predicting the price trend to revert. How can both the phenomena coexist? The solution is the investment horizon. While the momentum effect arises in the mid-term (3–12 months), the reversal occurs either in the short term (1 month) or in the long term (3–5 years). This chapter thoroughly discusses both the sources and implementation of reversal strategies in financial markets. The authors also showcased various improvements to the reversal strategies providing vast theoretical and empirical evidence in their support. Finally, they individually tested the reversal techniques across 24 different equity markets.
Several predetermined variables that reflect levels of bond and stock prices appear to predict returns on common stocks of firms of various sizes, long-term bonds of various default risks, and default-free bonds of various maturities. The returns on small-firm stocks and low-grade bonds are more highly correlated in January than in the rest of the year with previous levels of asset prices, especially prices of small-firm stocks. Seasonality is found in several conditional risk measures, but such seasonality is unlikely to explain, and in some cases is opposite to, the seasonal found in mean returns.
this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (19621985) and for all subperiod for a variety of aggregate returns indexes and size-sorted portofolios. Although the rejections are due largely to the behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or timevarying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a mean-reverting model of asset prices.
In this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived
from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (1962–1985)
and for all subperiods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are
due largely to the behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or
time-varying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a mean-reverting
model of asset prices.
The paper re-examines the empirical evidence for mean-reverting behaviour in stock prices. Comparison of data before and after
World War II shows that mean reversion is entirely a pre-war phenomenon. Using randomization methods to calculate significance
levels, we find that the full sample evidence for mean reversion is weaker than previously indicated by Monte Carlo methods
under a Normal assumption. Further, the switch to mean-averting behaviour after the war is about to be too strong to be compatible
with sampling variation. We interpret these findings as evidence of a fundamental change in the stock returns process and
conjecture that it may be due to the resolution of the uncertainties of the 1930's and 1940's.
This study tests for mean-reverting tendencies in the accounting ratios of ‘excellent’ and ‘non-excellent’ UK companies and also in the market returns of these companies' shares over the period 1973–1987. The abnormal returns which are observed appear to confirm the findings of US studies that have suggested regularities in the market trends of share prices. This ‘over-reaction’ (‘winner-loser’) effect may be explained by investor ‘irrationality’, which has been highlighted by analyses in the field of cognitive psychology. Thus the stereotyping of shares as ‘winners’ seems to create a reluctance among investors to sell these shares in spite of poor company performance. By contrast the characterisation of other shares as ‘losers’ apparently inhibits investors' propensity to buy them, notwithstanding a marked improvement in company results. Other explanations, including neglect by the investment analyst community and changes in the level of market risk, are also considered.
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.
This paper tests the overreaction hypothesis using monthly data for stocks listed on the Toronto Stock Exchange over the 1950–1988 period. Unlike De Bondt and Thaler (1985), (1987), it finds statistically significant continuation behavior for the next one (and two) year(s) for winners and losers, and insignificant reversal behavior for winners and losers over longer formation/test periods of up to ten years. While the systematic risks of the winners decrease significantly over all test periods, the systematic risks of the losers increase significantly for only the 12-month formation/test periods (unlike Chan (1988)). The only significant change in variance from the formation to test periods occurs for the losers for the 12-month formation/test periods. The findings are robust for January versus non-January and size-based portfolios (unlike Zarowin (1989), (1990)). The findings are robust for various performance measures (specifically, market-adjusted CAR, and the Jensen (1968) and Sharpe (1966) portfolio performance measures).
This paper investigates transitory components in stock prices. After showing that statistical tests have little power to detect persistent deviations between market prices and fundamental values, we consider whether prices are mean-reverting, using data from the United States and 17 other countries. Our point estimates imply positive autocorrelation in returns over short horizons and negative autocorrelation over longer horizons, although random-walk price behavior cannot be rejected at conventional statistical levels. Substantial movements in required returns are needed to account for these correlation patterns. Persistent, but transitory, disparities between prices and fundamental values could also explain our findings.
A number of authors have identified a small set of economic variables which can predict excess US stock and bond returns. In this paper we extend these results by estimating models for Germany, Japan, the UK and the US which include both financial and ‘technical’ variables, and achieve a much higher degree of explanatory power than in earlier studies. In particular we find – a role for the change in the term structure of interest rates in predicting equity returns; that the ‘technical’ variables have a role in predicting both bond and equity returns; and that there is strong seasonality in both the bond and stock markets of the UK.
Recent evidence reveals significant negative serial correlation in aggregate (market-wide) stock returns. We extend this result to relative (market-adjusted) returns, demonstrating negative serial correlation in five-year returns. We then test two competing explanations: (1) market mispricing and (2) changing expected returns in an efficient market. The tests are conducted using the capital asset pricing model to estimate relative returns. The evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks, and therefore expected relative returns, through time. We document substantial relative risk shifts, particularly for extreme-performing stocks.
A slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns. The autocorrelation is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns. In tests for the 1926-85 period, large negative autocorrelations for return horizons beyond a year suggest that predictable price variation due to mean reversion accounts for large fractions of 3 to 5-year return variances. Predictable variation is estimated to be about 40 percent of 3 to 5-year return variances for portfolios of small firms. The percentage falls to around 25 percent for portfolios of large firms. Copyright 1988 by University of Chicago Press.
Recent research has found an abnormal return on the strategy of buying lo sers and selling winners in the stock market, a finding sometimes int erpreted as support for the market overreaction hypothesis. This arti cle explores an alternative interpretation of this evidence. The auth or finds that the risks of losers and winners are not constant. The e stimation of the return of this strategy is, therefore, sensitive to the methods used. When risk changes are controlled for, only small ab normal returns are found. The model of risk and return used in the pa per is the standard capital asset pricing model. Copyright 1988 by the University of Chicago.
The efficient market hypothesis has been widely tested and, with few exceptions, found consistent with the data in a wide variety of markets: the New York and American Stock Exchanges, the Australian, English, and German stock markets, various commodity futures markets, the Over-the-Counter markets, the corporate and government bond markets, the option market, and the market for seats on the New York Stock Exchange. Yet, in a manner remarkably similar to that described by Thomas Kuhn in his book, The Structure of Scientific Revolutions, we seem to be entering a stage where widely scattered and as yet incohesive evidence is arising which seems to be inconsistent with the theory. As better data become available (e.g., daily stock price data) and as our econometric sophistication increases, we are beginning to find inconsistencies that our cruder data and techniques missed in the past. It is evidence which we will not be able to ignore. The purpose of this special issue of the Journal of Financial Economics is to bring together a number of these scattered pieces of anomalous evidence regarding Market Efficiency. As Ball (1978) points out in his survey article: taken individually many scattered pieces of evidence on the reaction of stock prices to earnings announcements which are inconsistent with the theory don't amount to much. Yet viewed as a whole, these pieces of evidence begin to stack up in a manner which make a much stronger case for the necessity to carefully review both our acceptance of the efficient market theory and our methodological procedures.
A highly controversial issue in financial economies is whether stocks overreact. In this paper we find an economically-important overreaction effect even after adjusting for size and beta. In portfolios formed on the basis of prior five-year returns, extreme prior losers outperform extreme prior winners by 5–10% per year during the subsequent five years. Although we find a pronounced January seasonal, our evidence suggests that the overreaction effect is distinct from tax-loss selling effects. Interestingly, the overreaction effect is substantially stronger for smaller firms than for larger firms. Returns consistent with the overeaction hypothesis are also observed for short windows around quarterly earnings announcements.
In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.
This paper uses the predictability of monthly excess returns on U.S. and Japanese equity portfolios over the U.S Treasury bill rate to study the integration of long-term capital markets in these two countries. During the period 1971-90, similar variables, including the dividend-price ratio and interest-rate variables, help to forecast excess returns in each country. In addition, in the 1980s, U.S. variables help to forecast excess Japanese stock returns. There is some evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long-term capital markets. Copyright 1992 by American Finance Association.
SEQUELS ARE RARELY AS good as the originals, so I approach this review of the market efficiency literature with trepidation. The task is thornier than it was 20 years ago, when work on efficiency was rather new. The literature is now so large that a full review is impossible, and is not attempted here. Instead, I discuss the work that I find most interesting, and I offer my views on what we have learned from the research on market efficiency.
The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.
Efficient Capital Markets: UPermanent and Temporary Components of Stock Market Prices
- E F Fama
Fama, E.F. (1991), 'Efficient Capital Markets: U,' Journal of Finance, Vol. 46 pp. 1575-1617. and K.R., French (1988), 'Permanent and Temporary Components of Stock Market Prices,'Journal of Political Economy, Vol. 96, pp. 246-273
Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration ’ LSE Financial Markets Discussion Paper
- J Andy Campbell
- Hamao