Assessing the Time-Varying Nature of the Over-Reaction Effect in UK
37 Pages Posted: 15 Apr 2009 Last revised: 19 Apr 2009
Date Written: January 12, 2009
Previous studies on the overreaction effect in UK show that prior losers consistently outperform prior winners in the period 1975 to 1990. This paper extends current knowledge by assessing the presence of the effect in the UK market for the period of 1987 to 2007. In contrast to earlier research, we produce evidence of a weak presence of the overreaction effect in the UK for the last decade. Further examination reveals that after adjusting for size, the effect almost disappears, while any considerable excess post-formation return to prior-losers is related to alternative market cycles and especially the periods 1987-1990 and the post-2002 era. These studies together imply that the presence of the overreaction effect in the UK stock market is time-varying and difficult to exploit in practice.
Keywords: Overreaction, stock market efficiency, small-size effect, time-variation
JEL Classification: G14, G32
Suggested Citation: Suggested Citation