How Do Stocks React to Extreme Market Events? Evidence from Brazil

38 Pages Posted: 22 Feb 2015

See all articles by Mo Chaudhury

Mo Chaudhury

McGill University - Desautels Faculty of Management

Pedro Piccoli

Universidade Católica do Paraná (Universidade Católica do Paraná)

Date Written: February 10, 2015

Abstract

This paper studies the short-term (21 trading days) behavior of Brazilian stocks in the event of extreme movements in the Brazilian market index. Using cumulative abnormal returns of contrarian and momentum strategies, we find that stocks tend to overreact after negative events while they exhibit normal reaction after positive shocks. This overreaction, however, is particularly intense when the broad market experience clustered extreme swings within the 21 days window, meaning that the short-term overreaction is correlated to market volatility. In these circumstances we find that the profit of the contrarian strategy is driven by the performance of the winner stocks despite a lower contemporaneous beta than the loser stocks.

Keywords: Overreaction, contrarian strategy, momentum, market efficiency, Brazilian market

JEL Classification: G14, G15

Suggested Citation

Chaudhury, Mo and Piccoli, Pedro, How Do Stocks React to Extreme Market Events? Evidence from Brazil (February 10, 2015). Available at SSRN: https://ssrn.com/abstract=2567825 or http://dx.doi.org/10.2139/ssrn.2567825

Mo Chaudhury (Contact Author)

McGill University - Desautels Faculty of Management ( email )

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Montreal, Quebec H3A 1G5
Canada
(514) 398-5927 (Phone)
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HOME PAGE: http://www.mcgill.ca/desautels/mo-chaudhury

Pedro Piccoli

Universidade Católica do Paraná (Universidade Católica do Paraná) ( email )

Curitiba
Brazil

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