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The Time-Varying Nature of the Overreaction Effect: Evidence from the UK

International Journal of Banking and Finance, Vol. 8, No. 3, pp. 1-36, 2011

Posted: 18 Jan 2012  

Panagiotis Andrikopoulos

Coventry University

Arief Daynes

University of Portsmouth - Business School

Paraskevas Pagas

University of Portsmouth

Date Written: August 11, 2011

Abstract

Previous studies on the overreaction effect in the UK show that prior losers consistently outperform prior winners in the period 1975 to 1990. This paper extends current knowledge by assessing the above phenomenon in the UK market for the period 1987 to 2007. In contrast to earlier research, we produce evidence of a weak presence of the overreaction effect for the latest test period. Further, we show that, after adjusting for size, the overreaction effect almost disappears and any additional excess post-formation return to prior-losers is attributable to market cycles. This study implies 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, Behavioral finance

JEL Classification: G14, G32

Suggested Citation

Andrikopoulos, Panagiotis and Daynes, Arief and Pagas, Paraskevas, The Time-Varying Nature of the Overreaction Effect: Evidence from the UK (August 11, 2011). International Journal of Banking and Finance, Vol. 8, No. 3, pp. 1-36, 2011. Available at SSRN: https://ssrn.com/abstract=1987227

Panagiotis Andrikopoulos (Contact Author)

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom
+44(0)247 765 7920 (Phone)

Arief Daynes

University of Portsmouth - Business School ( email )

Portsmouth, PO1 3DE
United Kingdom
+44 23 92844182 (Phone)
+44 23 92844037 (Fax)

HOME PAGE: http://www.port.ac.uk/departments/academic/ams/staff/title,1246,en.html

Paraskevas Pagas

University of Portsmouth ( email )

Department of Accounting and Finance
Portsmouth Business School
Portsmouth, Hants PO1 3DE
United Kingdom
+44(0)23 9284 4721 (Phone)
+44(0)23 9284 4037 (Fax)

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