On the Frequency of Price Overreactions

24 Pages Posted: 9 Jul 2018

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Alex Plastun

Sumy State University

Date Written: April 2018

Abstract

This paper explores the frequency of price overreactions in the US stock market by focusing on the Dow Jones Industrial Index over the period 1990-2017. It uses two different methods (static and dynamic) to detect overreactions and then carries out various statistical tests (both parametric and non-parametric) including correlation analysis, augmented Dickey–Fuller tests (ADF), Granger causality tests, and regression analysis with dummy variables. The following hypotheses are tested: whether or not the frequency of overreactions varies over time (H1), is informative about crises (H2) and/or price movements (H3), and exhibits seasonality (H4). The null cannot be rejected except for H4, i.e. no seasonality is found. On the whole it appears that the frequency of overreactions can provide useful information about market developments and for designing trading strategies.

Keywords: Stock Markets, Anomalies, Overreactions, Abnormal Returns, VIX, Frequency of Overreactions

JEL Classification: G12, G17, C63

Suggested Citation

Caporale, Guglielmo Maria and Plastun, Alex, On the Frequency of Price Overreactions (April 2018). CESifo Working Paper Series No. 7011, Available at SSRN: https://ssrn.com/abstract=3198485

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Alex Plastun

Sumy State University ( email )

Rymskyi-Korsakov str., 2
Sumy, 40000
Ukraine

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
48
Abstract Views
315
PlumX Metrics