Testing for Overreaction and Return Continuations in Stock Price Index Returns

Nathan Lael Joseph, Khelifa Mazouz

Research output: Contribution to journalArticle

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.
Original languageEnglish
Article number5
Pages (from-to)93-112
Number of pages20
JournalInternational Journal of Strategic Decision Sciences
Volume1
Issue number2
DOIs
Publication statusPublished - 1 Jul 2010
Externally publishedYes

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