On stock price overreactions: frequency, seasonality and information content

Abstract

This paper explores the frequency of price overreactions in the US stock market by focusing on the Dow Jones Industrial Index over the period 1990-2017. It uses two different methods (static and dynamic) to detect overreactions and then carries out various statistical tests (both parametric and non-parametric) including correlation analysis, augmented Dickey-Fuller tests (ADF), Phillips-Perron (PP) tests, Granger causality tests, and regression analysis with dummy variables. The following hypotheses are tested: whether or not the frequency of overreactions varies over time (H1), is informative about crises (H2) and/or price movements (H3), and exhibits seasonality (H4). The null cannot be rejected except for H4, i.e., no seasonality is found. On the whole, it appears that the frequency of overreactions can provide useful information about market developments. A sharp increase in the number of overreactions occurs in crisis periods. The frequency of overreactions is linked to the VIX index and therefore could be used as an alternative measure of market sentiment and market fear, and it also affects stock returns. Further, our findings provide evidence supporting market inefficiency since price predictability can allow investors to design profitable trading strategies; in addition, the fact that the frequency of overreactions varies over time is consistent with the Adaptive Expectations Hypothesis. ARTICLE HISTORY

Bitcoin Returns and the Frequency of Daily Abnormal Returns

“…This is confirmed by who showed that the correlation between the frequency of abnormal returns (based on the two aforementioned methods for abnormal returns detection in turn) and the VIX index dynamics is much higher when using the static approach, which is crucial for the purposes of our analysis (i.e. price prediction); 30 specifically, the dynamic trigger approach produces a correlation coefficient of 0.12 whilst the static one yields a coefficient equal to 0.81. Therefore, the static approach will be applied here.…”

Evolution of price effects after one-day abnormal returns in the US stock market

“…More recently Kudryavtsev (2013) found evidence of price reversals in the Dow Jones Industrial Index after a day of large high (low) to close prices. Furthermore, Caporale and Plastun (2019a) extended the literature on the US stock market by investigating the frequency of overreactions and found that these were linked to volatility (VIX index). This suggested that overreactions could be used as predictors of market sentiment.…”

“…This suggested that overreactions could be used as predictors of market sentiment. No profitable trading opportunities from overreactions where found by Caporale and Plastun (2019a) suggesting market efficiency. Evidence of overreactions were also found by Caporale et al (2019) in the US stock market using weekly data.…”

“…Recently, Dyl et al (2019) questions the underlying reasons for the overreaction hypothesis after finding contradictory investor behaviour regarding the rational use of price related information. In general, new evidence (Zaremba (2019), Caporale et al (2019), Caporale and Plastun (2019a), and Zaremba et al (2020)) is emerging about the existence price overreactions.…”

Market Overreaction Pada Bursa Efek Indonesia Dengan Size Effect Sebagai Variabel Pemoderasi

“…Melalui pengujian secara statik dengan menggunakan 2 buah indeks dan beberapa saham blue chips, dibuktikan bahwa overrection terjadi pada pasar modal Ukraina (Plastun et al, 2018). Selain penelitian overreaction secara statik, pembuktian secara statik dan dinamik juga dilakukan untuk meneliti frekuensi harga overreaction dengan statistik parametrik dan non parametrik (Caporale & Plastun, 2019a). Fenomena overreaction juga terjadi pada industri real estate.…”