Modeling and measuring intraday overreaction of stock prices

Klößner, Stefan; Becker, Martin; Friedmann, Ralph

doi:10.1016/j.jbankfin.2011.11.005

Cited by 18 publications

(5 citation statements)

References 42 publications

(32 reference statements)

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“…Extant literature finds that reversals are more likely following negative returns than positive returns (Fabozzi et al 1995, Sturm 2003, Klößner et al 2012. Consistent with this, our findings suggest that reversal of Monday returns is more significant when Monday return is negative.…”

supporting

confidence: 87%

Reversal of Monday returns

Ülkü

Andonov

2015

Quantitative Finance

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This paper elaborates an interesting aspect of the Monday anomaly: Monday returns are relatively more likely to reverse over the subsequent days. We document that, although the Monday low-return anomaly disappeared, the subsequent reversal of Monday returns remains robust to date. The reversals, measured over a five-day horizon, are pervasive across international stock markets, reasonably stable over time, significant following both positive and negative Monday returns, and not confined to extreme Monday returns. Trading strategies designed to exploit these reversals earn economic profits. We examine potential explanations for the reversal of Monday returns using trading flows data of investor types from Korea. All predictions of the Foster and Viswanathan [J. Finance, 1993, 48, 187-211] model are confirmed: volatility is higher, trading volume is lower, market depth is lower and price impact costs are higher on Mondays. The model implies lower price quality on Mondays, but does not specifically predict reversal of Monday returns. We show that the trading intensity of international/institutional investors is lower on Mondays. This appears to make the market relatively more susceptible to individual investors' trading, which is negatively correlated with international/institutional investors. Thus, Monday returns are relatively more likely to reverse during the subsequent days of the week when institutional investors trade more aggressively.

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supporting

confidence: 87%

Reversal of Monday returns

Ülkü

Andonov

2015

Quantitative Finance

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“…3. We inquired whether there was a tendency for over-reactions (reversals) to coincide with bad news (negative initial returns), in line with Klößner et al (2012). Whilst initial negative returns were reversed/partially reversed by the end of the day in 58 per cent of the cases, initial positive returns were reversed/partially reversed in 61 per cent of the cases, suggesting that reversals in our sample are not associated with bad news.…”

Section: Notesmentioning

confidence: 89%

Do call auctions curtail price volatility? Evidence from the National Stock Exchange of India

Camilleri

2015

Managerial Finance

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Purpose – The purpose of this paper is to empirically investigate whether call auctions which batch orders for simultaneous execution, may restrain stock market volatility. Design/methodology/approach – The authors use high-frequency data to investigate volatility changes following the suspension of opening and closing call auctions on the National Stock Exchange (NSE) of India in 1999. The authors evaluate this issue by considering both modelled and realised volatility. Using a GARCH approach the authors model intra-day volatility for the trading days preceding and succeeding the auction suspension. The authors also scrutinise return distributions to look for volatility changes during different parts of the day. Findings – When interpreted collectively, the empirical results suggest that the auction suspension was followed by reduced volatility particularly in the middle of the trading day and at the closing. Practical implications – Given that auctions are often incorporated in trading systems with the aim of curtailing volatility, the main conclusion, that the auction suspension was followed by lower volatility, has important practical inferences. Auctions cannot be automatically relied on to reduce volatility. The intricacies of the auction protocol and their interaction with ancillary market microstructure features may impact on auction efficacy. Originality/value – The paper adopts a novel approach towards assessing the effectiveness of auctions by considering an unusual occurrence of an auction suspension. The empirical setting enables a clear comparison of the respective regimes since these periods do not materially differ in other subsidiary aspects. This is a noteworthy factor, since the empirical contexts considered in prior studies, often feature several simultaneous changes.

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“…Klößner et al . () developed a statistical approach to detect intra‐day overreaction. These researchers found that Chinese investors over‐react to good news with greater emphasis than to bad news compared with investors in the US and German markets, who overreact more to bad news than to good news.…”

Section: Literature Reviewmentioning

confidence: 99%

Positive Return–Volatility Correlation and Short Sale Constraints: Evidence from the Chinese Market

Luo

2018

Asia-Pac J of Fin Stud

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The market price is a convex function of information when short sales are constrained. Borrowing constraints limit investors to bidding up the price. The two effects imply an asymmetric return-volatility correlation (RVC) when information shifts. We build a model to show that: (i) short selling decreases RVC, while margin trading increases RVC; (ii) RVC increases with disagreement; and (iii) RVC increases with returns. The Chinese stock market is ideal for the empirical test because only certain stocks are eligible for short selling and margin trading in the slow policy adoption process. We obtain evidence to support the theoretical predictions correlation.

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Modeling and measuring intraday overreaction of stock prices

Cited by 18 publications

References 42 publications

Reversal of Monday returns

Reversal of Monday returns

Do call auctions curtail price volatility? Evidence from the National Stock Exchange of India

Positive Return–Volatility Correlation and Short Sale Constraints: Evidence from the Chinese Market

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