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Testing for Overreaction and Return Continuations in Stock Price Index Returns

Testing for Overreaction and Return Continuations in Stock Price Index Returns

Nathan Lael Joseph, Khelifa Mazouz
Copyright: © 2010 |Volume: 1 |Issue: 2 |Pages: 20
ISSN: 1947-8569|EISSN: 1947-8577|EISBN13: 9781609604547|DOI: 10.4018/jsds.2010040105
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MLA

Joseph, Nathan Lael, and Khelifa Mazouz. "Testing for Overreaction and Return Continuations in Stock Price Index Returns." IJSDS vol.1, no.2 2010: pp.93-112. http://doi.org/10.4018/jsds.2010040105

APA

Joseph, N. L. & Mazouz, K. (2010). Testing for Overreaction and Return Continuations in Stock Price Index Returns. International Journal of Strategic Decision Sciences (IJSDS), 1(2), 93-112. http://doi.org/10.4018/jsds.2010040105

Chicago

Joseph, Nathan Lael, and Khelifa Mazouz. "Testing for Overreaction and Return Continuations in Stock Price Index Returns," International Journal of Strategic Decision Sciences (IJSDS) 1, no.2: 93-112. http://doi.org/10.4018/jsds.2010040105

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Abstract

In this paper, the authors examine the impacts of large price changes (or shocks) on the abnormal returns (ARs) of a set of 39 national stock indices. Their initial results support returns continuations for both positive and negative shocks in line with prior results. After controlling for market size, their findings provide support for over-reaction, return continuations and market efficiency, but these result depend on the magnitude of the price shocks. Whilst the market is efficient when the positive shocks are large, the market also over-reacts when negative shocks are large. To illustrate, for large stock markets that are more liquid, positive shocks of more than 5% generate an insignificant day one CAR of -0.004%, whilst negative shocks of more than 5% generate a positive and significant day one CAR of 0.662%. In contrast, positive (negative) shocks of less than 5% generate a significant one day CAR of 0.119% (-0.174%) for these same (large) stock markets.

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