Stock Overreaction to Extreme Market Events

40 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: January 12, 2015

Abstract

In this paper we find that stocks overreact to both positive and negative extreme daily movements of the broader market, but more intensely in the latter case. The overreaction is even more pronounced when the market exhibits clustered extreme swings, indicating that the overreaction is related to market volatility. Indeed, a contrarian investment strategy earns a significant Fama-French daily alpha of 0.34% (85.68% annualized) with a Sharpe ratio of 5.23 in highly volatile circumstances. Stock overreaction appears to be driven by the loser stocks that revert more strongly, even as they exhibit a lower market beta than the winners.

Keywords: Overreaction, contrarian strategy, momentum crash, market efficiency, extreme market events

JEL Classification: G14, G15

Suggested Citation

Chaudhury, Mo and Piccoli, Pedro, Stock Overreaction to Extreme Market Events (January 12, 2015). Available at SSRN: https://ssrn.com/abstract=2567832 or http://dx.doi.org/10.2139/ssrn.2567832

Mo Chaudhury (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A 1G5
Canada
(514) 398-5927 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://www.mcgill.ca/desautels/mo-chaudhury

Pedro Piccoli

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

Curitiba
Brazil

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
238
Abstract Views
1,141
rank
161,720
PlumX Metrics