Mispricing Following Public News: Overreaction for Losers, Underreaction for Winners

44 Pages Posted: 25 Mar 2008

See all articles by Ferhat Akbas

Ferhat Akbas

affiliation not provided to SSRN

Emre Kocatulum

Massachusetts Institute of Technology Department of Economics

Sorin M. Sorescu

Texas A&M University - Department of Finance

Date Written: March 17, 2008

Abstract

We document an important relation between two well-established anomalies: momentum and short-term reversal. Only stocks with negative momentum experience short-term reversal. Using Chan's (2003) news database, we show that the market appears to overreact to public news following bad past performance and underreact following strong past performance. The results are robust to using alternative methodologies. Stocks with current good news and negative momentum earn on average -9.3% annual raw returns during the subsequent month, while stocks with current good news and positive momentum earn 32.2%. The large, negative raw returns point to cognitive biases, rather than risk-based explanations, as the source of abnormal returns.

Keywords: Momentum, reversion, cognitive biases, market efficiency, anomalies, overreaction, underreacton, overconfidence, cognitive dissonance

JEL Classification: G12, G14

Suggested Citation

Akbas, Ferhat and Kocatulum, Emre and Sorescu, Sorin M., Mispricing Following Public News: Overreaction for Losers, Underreaction for Winners (March 17, 2008). Available at SSRN: https://ssrn.com/abstract=1107690 or http://dx.doi.org/10.2139/ssrn.1107690

Ferhat Akbas

affiliation not provided to SSRN

Emre Kocatulum

Massachusetts Institute of Technology Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Sorin M. Sorescu (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

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