Recent Evidence on International Stock Market’s Overreaction

Journal of Economic Asymmetries, Forthcoming

32 Pages Posted: 10 Nov 2020

See all articles by Paulo F. Pereira Alves

Paulo F. Pereira Alves

CMVM - Portuguese Securities and Exchange Commission, ISCAL and Lusofona University

Luís Carvalho

affiliation not provided to SSRN

Date Written: September 22, 2020

Abstract

This paper examines the overreaction hypothesis on market indices for three- and five-year investment periods using end-of-month data from 49 Morgan Stanley Capital International indices from December 1970 to December 2018. The returns were computed as holding-period returns, instead of cumulative average returns, to avoid an upward bias. We found economically and statistically significant return reversals for both the three-year and five-year investment periods. When implemented in developed markets only, there is evidence that supports the overreaction hypothesis, although the excess returns are smaller than those observed in the whole sample. Not only did the losers outperform the winners, but the former were also less risky. Notwithstanding these results, the overreaction strategy is sensitive to the periods considered, thus highlighting the possibility that its success is not time stationary.

Keywords: Market indices, overreaction hypothesis, winner–loser reversals

JEL Classification: G10, G14, G15

Suggested Citation

Pereira Alves, Paulo F. and Carvalho, Luís, Recent Evidence on International Stock Market’s Overreaction (September 22, 2020). Journal of Economic Asymmetries, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3697120 or http://dx.doi.org/10.2139/ssrn.3697120

Paulo F. Pereira Alves (Contact Author)

CMVM - Portuguese Securities and Exchange Commission, ISCAL and Lusofona University ( email )

Rua Laura Alves n.º 4 Apartado 14258
Lisbon
Portugal

Luís Carvalho

affiliation not provided to SSRN

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