Overreaction in Stock Forecasts and Prices

43 Pages Posted: 2 Aug 2009

See all articles by Alen Nosic

Alen Nosic

affiliation not provided to SSRN

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: July 21, 2009

Abstract

We study the degree of individual and aggregate market overreaction in a dynamic experimental auction market. In 13 sessions with overall 101 students we find overreaction to new information both in stock price forecasts and transaction prices. Interestingly, market forces do not seem to help in lowering overreaction to new information in our setting. Moreover, we illustrate that subjects are not able to learn from their previous failures and thus do not correct their erroneous beliefs. Hence, overreaction in our setting remains on a stable level although subjects can at least in theory learn from other market participants or from outcome feedback. Lastly, we find first experimental evidence for a positive relation between differences of opinion and trading volume in a continuous auction market with several market participants.

Keywords: overreaction, underreaction, market experiment, differences of opinion, trading volume

JEL Classification: G1

Suggested Citation

Nosic, Alen and Weber, Martin, Overreaction in Stock Forecasts and Prices (July 21, 2009). Available at SSRN: https://ssrn.com/abstract=1441271 or http://dx.doi.org/10.2139/ssrn.1441271

Alen Nosic (Contact Author)

affiliation not provided to SSRN ( email )

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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