Abstract

http://ssrn.com/abstract=932991
 
 

References (22)



 
 

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Overreaction Diamonds: Precursors and Aftershocks for Significant Price Changes


Ahmet Duran


University of Michigan at Ann Arbor

Gunduz Caginalp


University of Pittsburgh - Department of Mathematics


Quantitative Finance, 7(3), 2007, pp. 321-342

Abstract:     
Overreactions and other behavioral effects in stock prices can best be examined by adjusting for the changes in fundamentals. We perform this by subtracting the relative price changes in the net asset value (NAV) from that of the market price (MP) daily for 134,406 data points of closed end funds trading in US markets. We examine the days before and after a significant rise or fall in price deviation and MP return and find evidence of overreaction in the days after the change. Prior to a spike in deviation we find a gradual two or three day decline (and analogously in the other direction). Overall, there is a characteristic diamond pattern, revealing a symmetry in deviations before and after the significant change. Much of the statistical significance and the patterns disappear when the subtraction of NAV return is eliminated, suggesting that the frequent changes in fundamentals mask behavior effects. A second study subdivides the data depending on whether the NAV or MP is responsible for the spike in the relative difference. In a majority of spikes, it is the change in market price rather than NAV that is dominant. Among those spikes for which there is little or no change in NAV, the results are similar to the overall study. Furthermore, the upward spikes are preceded by one or two days of declining market price while NAV rises slightly or is relatively unchanged. This suggests that a cause of the spike may be due to over-positioning of traders in the opposite direction in anticipation.

Number of Pages in PDF File: 24

Keywords: Overreaction, Price deviation, Diamond pattern, Overpositioning, Market dynamics, Financial markets, Behavioral finance, Closed-end funds

JEL Classification: C12, G12

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Date posted: September 26, 2006 ; Last revised: March 30, 2009

Suggested Citation

Duran, Ahmet and Caginalp, Gunduz, Overreaction Diamonds: Precursors and Aftershocks for Significant Price Changes. Quantitative Finance, 7(3), 2007, pp. 321-342 . Available at SSRN: http://ssrn.com/abstract=932991

Contact Information

Ahmet Duran (Contact Author)
University of Michigan at Ann Arbor ( email )
Ann Arbor, MI 48109
United States
Gunduz Caginalp
University of Pittsburgh - Department of Mathematics ( email )
507 Thackeray Hall
Pittsburgh, PA 15260
United States
412-624-8339 (Phone)
412-624-8397 (Fax)
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