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The spot price on the Taiwan stock index is richer in information than the futures price judged by the price discovery measures of Gonzalo and Granger [Gonzalo, J., & Granger, C.W.J. (1995). Estimation of common long‐memory components in cointegrated systems. Journal of Business and Economic Statistics, 13, 27–35.] and Hasbrouck [Hasbrouck, J. (1995). One security, many markets: Determining the contributions to price discovery. Journal of Finance, 50, 1175–1199.]. What is special about the markets is that both the spot and futures error‐correction coefficients are positive, implying a digressive convergence to their long‐run equilibrium in the error‐correction (EC) process. Innovation accounting suggests that the cause of this digressive equilibrium adjustment is that investors systematically overreact to news in the less informative futures market but under‐react to the more informative spot market. Our contribution is in identifying the digressive convergence implied by same‐sign EC coefficients, comparing it to the normal convergence widely found in opposite‐sign EC models, and providing short‐run mispricing interpretations for both types of convergence to equilibrium.

This study adopts the methodology introduced by Lee (2006) to analyze stock prices in response to information shocks in six of Taiwan's stock market sectors and present market anomalies utilizing behavioral¯nance theory. Using the Residual Income Model (RIM) of equity valuation, we speci¯ed our empirical model to identify structural fundamental and nonfundamental shocks from reduced-form tangible and intangible news, and we obtained three major results. First, fundamental shock is primarily induced by tangible news and nonfundamental shock by intangible news, suggesting that tangible-oriented RIM can capture the information content of stock prices. Second, impulse response analyses show that investors generally underreact to fundamental shocks and consistently overreact to nonfundamental shocks in the short-run. This¯nding is compatible with the overcon¯dence theory of Daniel et al. (1998) in behavioral¯nance literature. Third, information di®usion e±ciency in a market appears to depend on the value relevance quality of its tangible information. This is based on our¯nding that when tangible information constitutes a higher share of a market's fundamental shock, its price converges faster to the long-run equilibrium associated with the shock. Rev. Pac. Basin Finan. Mark. Pol. 2012.15. Downloaded from www.worldscientific.com by MONASH UNIVERSITY on 04/11/15. For personal use only.1 The recent analysis by Lee (2006) is an example relating time-series price reactions to behavioral theory of market anomalies. He found that Dow Jones and S&P 500 indices overreact to intangible information but underreact to tangible information, a result compatible with the overcon¯dence hypothesis of Daniel et al. (1998). Lin (2005) also documented evidence of investor overcon¯dence in Taiwan's stock markets.