Overreaction and the Cross-Section of Returns: International Evidence

40 Pages Posted: 25 Jun 2016 Last revised: 23 Apr 2017

Date Written: January 14, 2017

Abstract

Theory has linked price momentum with price reversals (Barberis, Shleifer, and Vishny (1998), Daniel, Hirshleifer, and Subrahmanyam (1998), and Hong and Stein (1999)). The models generally rely on behavioral descriptions of irrational investors who push prices beyond their fundamental value thus leading to an inevitable price reversal. While significant empirical evidence has shown the presence of momentum in global equity returns, there have been no large-scale global studies of the subsequent long-term price reversals. We study returns from twenty-three developed countries categorized into the regions of North America, Europe, Japan, and Asia, over 1993-2014 and find evidence supporting the global presence of long-term price reversal. The positive return differential between loser stocks over the past three years and winner stocks over the past three years is economically and statistically significant. Results from independent double sorts and from Fama-MacBeth regressions show that long-term reversals remains significant after controlling for size, book-to-market equity, and momentum.

Keywords: Return predictability, overreaction, long-term reversals, market efficiency, cross-section of returns, international asset pricing

JEL Classification: F30, G02, G10, G11, G12

Suggested Citation

Blackburn, Douglas W. and Cakici, Nusret, Overreaction and the Cross-Section of Returns: International Evidence (January 14, 2017). Journal of Empirical Finance, Vol. 42, 2017; Gabelli School of Business, Fordham University Research Paper No. 2800188. Available at SSRN: https://ssrn.com/abstract=2800188 or http://dx.doi.org/10.2139/ssrn.2800188

Douglas W. Blackburn (Contact Author)

JP Morgan Chase ( email )

New York, NY
United States

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

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