Testing for Overreaction and Return Continuations in Stock Price Index Returns

2010 ◽  
Vol 1 (2) ◽  
pp. 93-112 ◽  
Author(s):  
Nathan Lael Joseph ◽  
Khelifa Mazouz
Keyword(s):  
Market Efficiency ◽  
Stock Markets ◽  
Stock Price ◽  
Price Index ◽  
Abnormal Returns ◽  
Market Size ◽  
Price Shocks ◽  
Price Changes ◽  
Stock Indices ◽  
Initial Results

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.

Testing for Overreaction and Return Continuations in Stock Price Index Returns

2012 ◽  
pp. 137-156
Author(s):  
Nathan Lael Joseph ◽  
Khelifa Mazouz
Keyword(s):  
Market Efficiency ◽  
Stock Markets ◽  
Stock Price ◽  
Price Index ◽  
Abnormal Returns ◽  
Market Size ◽  
Price Shocks ◽  
Stock Indices ◽  
Stock Price Index ◽  
Initial Results

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.

On the Chinese Lunar New Year Effect in Six Asian Stock Markets: An Empirical Analysis (1991–2000)

2001 ◽  
Vol 04 (04) ◽  
pp. 463-478 ◽  
Author(s):  
Gili Yen ◽  
Cheng F. Lee ◽  
Cheng-Lung Chen ◽  
Wei-Chi Lin
Keyword(s):  
Hong Kong ◽  
Financial Crisis ◽  
Stock Markets ◽  
Stock Price ◽  
Price Index ◽  
Investment Strategy ◽  
Asian Financial Crisis ◽  
Sample Period ◽  
Year Effect ◽  
Stock Indices

This paper examines the existence/nonexistence of the Chinese Lunar New Year effect in Hong Kong, Japan, South Korea, Malaysia, Singapore, and Taiwan in recent years. Using longitudinal stock price index data from 1991 to 2000, the authors find that cumulative returns based on stock indices in the above mentioned Asian markets exhibit a consistently up-moving trend before or after the Chinese Lunar New Year, providing evidence for continued existence of the Chinese Lunar New Year effect in these six Asian stock markets in recent years. However, when the sample period is divided into before- vs. after-Asian financial crisis period, different patterns emerge. In the wake of the Asian financial crisis, the crisis effect has some role to play, especially, for Malaysia and Singapore. In viewing the timing and patterns of the Chinese Lunar New Year effect in these six Asian markets differ from each other, the authors also recommend to investors the best investment strategy to capture the largest returns.

scholarly journals Review on Efficiency and Anomalies in Stock Markets

Economies ◽  
2020 ◽  
Vol 8 (1) ◽  
pp. 20 ◽  
Author(s):  
Kai-Yin Woo ◽  
Chulin Mai ◽  
Michael McAleer ◽  
Wing-Keung Wong
Keyword(s):  
Market Efficiency ◽  
Behavioral Finance ◽  
Stock Markets ◽  
Stock Price ◽  
Efficient Market Hypothesis ◽  
Past Century ◽  
Behavioral Models ◽  
Market Anomalies ◽  
Policy Makers ◽  
Conflicting Evidence

The efficient-market hypothesis (EMH) is one of the most important economic and financial hypotheses that have been tested over the past century. Due to many abnormal phenomena and conflicting evidence, otherwise known as anomalies against EMH, some academics have questioned whether EMH is valid, and pointed out that the financial literature has substantial evidence of anomalies, so that many theories have been developed to explain some anomalies. To address the issue, this paper reviews the theory and literature on market efficiency and market anomalies. We give a brief review on market efficiency and clearly define the concept of market efficiency and the EMH. We discuss some efforts that challenge the EMH. We review different market anomalies and different theories of Behavioral Finance that could be used to explain such market anomalies. This review is useful to academics for developing cutting-edge treatments of financial theory that EMH, anomalies, and Behavioral Finance underlie. The review is also beneficial to investors for making choices of investment products and strategies that suit their risk preferences and behavioral traits predicted from behavioral models. Finally, when EMH, anomalies and Behavioral Finance are used to explain the impacts of investor behavior on stock price movements, it is invaluable to policy makers, when reviewing their policies, to avoid excessive fluctuations in stock markets.

Semi-strong Form Market Efficiency in Stock Markets with Low Levels of Trading Activity: Evidence from Stock Price Reaction to Major National and International Events

2017 ◽  
Vol 18 (6) ◽  
pp. 1447-1464
Author(s):  
C. Justin Robinson ◽  
Prosper Bangwayo-Skeete
Keyword(s):  
Market Efficiency ◽  
Stock Prices ◽  
Stock Markets ◽  
Stock Price ◽  
Strong Form ◽  
Trading Activity ◽  
Price Reaction ◽  
Stock Price Reaction ◽  
Low Levels ◽  
International Events

This study uses the event study methodology to explore semi-strong form market efficiency in the context of low levels of trading activity. Covering six frontier stock markets, it investigates stock price reaction to major national news events that include natural disasters, parliamentary elections and credit rating reviews and the international events such as international terrorist incidents, major events surrounding the 2007/2008 sub-prime mortgage crisis and the United Kingdom’s referendum on membership in the European Union (Brexit). The results of the event studies, which feature a correction for low levels of trading activity, show that in sharp contrast with more actively traded markets, stock prices on markets with relatively low levels of trading activity did not react to the vast majority of major news events, and only tended to react to rare events with major consequences. Usually, where stock prices reacted to a news event, the reaction was significantly delayed, which is inconsistent with semi-strong form market efficiency. The implication is that low levels of trading activity may be associated with semi-strong form inefficiency, and stock prices in such markets may not fully reflect all relevant available information, and may be of limited value to a variety of decision-makers.

scholarly journals Stock price response to earnings announcements: Developed versus emerging economies

2018 ◽  
Vol 15 (4) ◽  
pp. 29-45 ◽  
Author(s):  
Ahmed M. Al-Baidhani
Keyword(s):  
Stock Price ◽  
Value Relevance ◽  
Price Change ◽  
Explanatory Power ◽  
Abnormal Returns ◽  
Relevance Theory ◽  
Individual Event ◽  
Price Changes ◽  
Price Response ◽  
Earnings Response Coefficient

This study aims to evaluate the usefulness and relevance of accounting earnings disclosures, as the key determinant of stock price changes. The main objective is to examine whether earnings response coefficient (ERC) behaviour could explain more fully the stock price changes, as to the reason why the stock price change is not equal to the number of announced earnings. The study is done with data sets from five countries of the Organization for Economic Co-operation and Development (OECD) group and Malaysia. The analysis is then grouped into developed markets: Japan, UK, Sweden, and Switzerland; and emerging markets: Malaysia and Mexico, for the period 2001-2014. Two measures of abnormal returns are regressed against the size of the announced earnings. The first regression uses measures from individual events. The second regression uses a new measure; that is, from portfolios made out of all observations sorted by size of earnings into ten portfolios for each country and combination of countries. The portfolio method used was aimed at controlling possible idiosyncratic-errors-in-variables problem using individual event measures. The results using individual-event measures resulted in reasonable ERC sizes with high R2 explanatory power, a little higher than those reported in prior studies on other countries. Importantly, portfolio-based ERC is very close to the magnitude of the earnings in some tests, which supports the famous value relevance theory in accounting. This finding is new to this literature.

scholarly journals Month of the Year Effect in Indonesia Stock Exchange

2020 ◽  
Author(s):  
Agus Arman ◽  
Zakaria .
Keyword(s):  
Stock Price ◽  
Stock Return ◽  
Price Index ◽  
Stock Exchange ◽  
Significant Decline ◽  
Test Model ◽  
Year Effect ◽  
Basic Industry ◽  
Stock Indices ◽  
The One

This study examines the phenomenon of the month of the year effect on sectoral stock indices on the Indonesia Stock Exchange (IDX). The data used is monthly closing price data for sectoral stock price index during the period of 2016 to 2018 obtained from IDX (idx.co.id). Data analysis was performed using the one sample t test model. To test the hypothesis, ANOVA is used, using SPSS version 23. The results of this study show that: the agriculture index experienced a significant increase in every April, the mining index experienced a significant increase in every July, the basic industry index experienced a significant increase in April, miscellaneous industry indices experienced a significant decline in every May, the consumer goods index experienced a significant decline in every May, the property and real estate index did not experience a significant increase or decrease based on the month, infrastructure index experienced a significant increase in each of June and December, the finance index experienced a significant increase in every July and September, and the trade and service index did not experience a significant increase or decrease based on the month. Keywords: month of the year effect; stock return; stock sectoral index; IDX

scholarly journals Time Evolution of Market Efficiency and Multifractality of the Japanese Stock Market

2022 ◽  
Vol 15 (1) ◽  
pp. 31
Author(s):  
Tetsuya Takaishi
Keyword(s):  
Market Efficiency ◽  
Time Evolution ◽  
Stock Price ◽  
Price Index ◽  
Stock Exchange ◽  
Big Bang ◽  
System Reform ◽  
Trading System ◽  
Stock Trading ◽  
Year 2000

This study investigates the time evolution of market efficiency in the Japanese stock markets, considering three indices: Tokyo Stock Price Index (TOPIX), Tokyo Stock Exchange Second Section Index, and TOPIX-Small. The Hurst exponent reveals that the Japanese markets are inefficient in their early stages and improve gradually. TOPIX and TOPIX-Small showed an anti-persistence around the year 2000, which still persists. The degree of multifractality varies over time and does not show that the Japanese markets are permanently efficient. The multifractal properties of the Japanese markets changed considerably around the year 2000; this may have been caused by the complete migration from the stock trading floor to the Tokyo Stock Exchange’s computer trading system and the financial system reform, also known as the “Japanese Big Bang”.

STOCK MARKET REACTION TO BREXIT ANNOUNCEMENTS: EVIDENCE FROM A NATURAL EXPERIMENT

2019 ◽  
Vol 19 (03) ◽  
pp. 1950018 ◽  
Author(s):  
JÚLIO LOBÃO ◽  
SÍLVIA SANTOS
Keyword(s):  
Stock Market ◽  
Market Efficiency ◽  
Stock Markets ◽  
Natural Experiment ◽  
Abnormal Returns ◽  
Strong Form ◽  
Trading Activity ◽  
Stock Market Reaction ◽  
Cumulative Abnormal Returns ◽  
European Stock Markets

Using four Brexit-related announcements as a source of exogenous information shocks, we investigate the semi-strong form of efficiency in seven major European stock markets. Our results suggest that only the announcement of the Brexit referendum result produced statistically significant negative cumulative abnormal returns in the markets of the sample. However, with the exception of the Irish stock market, the effects ceased to be significant in a period of five trading sessions after the event. We also document an increase in trading activity, though statistically insignificant, in the day of the referendum and in the following days. Overall, our results are in line with the semi-strong form of market efficiency.

MARKET EFFICIENCY IN G-20 COUNTRIES: THE PARADOX OF FINANCIAL CRISIS

2013 ◽  
Vol 08 (01) ◽  
pp. 1350003 ◽  
Author(s):  
JOÃO PAULO VIEITO ◽  
K. V. BHANU MURTHY ◽  
VANITA TRIPATHI
Keyword(s):  
Financial Crisis ◽  
Market Efficiency ◽  
Stock Markets ◽  
Abnormal Returns ◽  
Weak Form ◽  
Ratio Test ◽  
Variance Ratio ◽  
Crisis Period ◽  
The World ◽  
Variance Ratio Test

This paper is amongst the first to investigate weak-form efficiency of the most developed (G-20) countries in the world. It also measures the impact of the 2007 financial crisis on the stock markets of these countries, in terms of their efficiency. Serial correlation test, ADF unit root test, Lo and MacKinlay (1988) variance ratio test, Chow and Denning (1993) RWH test and Wrights' 2000 ranks and signs based multiple variance ratio test were utilized to carry out this analysis. The entire study period was divided into a pre-crisis period (January 1, 2005 – August 8, 2007) and a during crisis period (August 9, 2007 – Deccember 31, 2011). Strong contemporaneous effects emerged across all international markets (except Saudi Arabia) as a consequence of the 2007 crisis. This may be due to increased international intra-day activity across the world markets. It was concluded that the "Samuelson dictum," which states that "while individual stocks are efficient, the market index is inefficient," seems to hold good on a global level by analogy. This is evident on the premise that, on the whole the 2007 crisis reduced return and increased volatility, even though individual markets became more efficient. The most robust result from the analysis is that most of the individual markets are weak-form efficient. Following the crisis of 2007, the methodology used indicates that on the whole, the market efficiency of individual stock markets improved.Hence, during the pre-crisis, volatility was low but heteroskedastic. However, during the period of the crisis, volatility was high but homoscedastic. The heightened volatility and low return that are a consequence of the crisis coupled with improved market efficiency, due to market vigil and control, ensure that abnormal returns and persistent arbitrage possibilities are wiped out. This appears to be a paradox of a crisis.

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