Testing for Overreaction and Return Continuations in Stock Price Index Returns

Nathan Lael Joseph, Khelifa Mazouz

Research output: Chapter in Book/Report/Conference proceedingChapter

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
Title of host publicationDecision Making Theories and Practices from Analysis to Strategy
EditorsMadjid Tavana
PublisherIGI Global
Chapter8
Pages137-156
Number of pages20
ISBN (Electronic)9781466615908
ISBN (Print)9781466615892
DOIs
Publication statusPublished - 12 Apr 2012
Externally publishedYes

Publication series

NameDecision Making Theories and Practices from Analysis to Strategy

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  • Cite this

    Joseph, N. L., & Mazouz, K. (2012). Testing for Overreaction and Return Continuations in Stock Price Index Returns. In M. Tavana (Ed.), Decision Making Theories and Practices from Analysis to Strategy (pp. 137-156). (Decision Making Theories and Practices from Analysis to Strategy). IGI Global. https://doi.org/10.4018/978-1-4666-1589-2.ch008