Hostname: page-component-7b7567c8c-jswmv Total loading time: 0 Render date: 2026-11-15T11:27:43.046Z Has data issue: false hasContentIssue false
  • English
  • Français

Continuing Overreaction and Stock Return Predictability

Published online by Cambridge University Press:  29 December 2016

Suk Joon Byun,
Sonya S. Lim and
Sang Hyun Yun
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

We study the return predictability of a measure of continuing overreaction based on the weighted average of signed volumes. We find that the strategies of buying stocks with upward continuing overreaction and selling stocks with downward continuing overreaction generate significant positive returns and that our measure of continuing overreaction is a better predictor of future returns than past returns. The results are stronger among stocks primarily held by investors more prone to biased self-attribution. Our results provide direct support for the model of return predictability based on overconfidence and biased self-attribution.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 6 , December 2016, pp. 2015 - 2046
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

References

Agarwal, V., and Taffler, R.. “Does Financial Distress Risk Drive the Momentum Anomaly?” Financial Management, 37 (2008), 461–484.Google Scholar
Almazan, A.; Hartzell, J. C.; and Starks, L. T.. “Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation.” Financial Management, 34 (2008), 5–34.Google Scholar
Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; and Whitelaw, R. F.. “Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns.” Journal of Financial Economics, 99 (2011), 427–446.Google Scholar
Barber, B., and Odean, T.. “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” Quarterly Journal of Economics, 116 (2001), 261–292.Google Scholar
Benos, A. V.“Aggressiveness and Survival of Overconfident Traders.” Journal of Financial Markets, 1 (1998), 353–383.Google Scholar
Brickley, J.; Lease, R.; and Smith, C. Jr. “Ownership Structure and Voting on Antitakeover Amendments.” Journal of Financial Economics, 20 (1988), 267–291.Google Scholar
Campbell, J.; Grossman, S.; and Wang, J.. “Trading Volume and Serial Correlation in Stock Returns.” Quarterly Journal of Economics, 108 (1993), 905–939.Google Scholar
Carhart, M. M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?” Journal of Financial Economics, 86 (2007), 279–305.Google Scholar
Chui, A.; Titman, S.; and Wei, K. C.. “Individualism and Momentum around the World.” Journal of Finance, 65 (2010), 361–392.Google Scholar
Conrad, J.; Hameed, A.; and Niden, C.. “Volume and Autocovariances in Short-Horizon Individual Security Returns.” Journal of Finance, 49 (1994), 1305–1329.Google Scholar
Cooper, M.“Filter Rules Based on Price and Volume in Individual Security Overreaction.” Review of Financial Studies, 12 (1999), 901–935.Google Scholar
Cooper, M. J.; Gutierrez, R. C. Jr.; and Hameed, A.. “Market States and Momentum.” Journal of Finance, 59 (2004), 1345–1365.Google Scholar
Cremers, M., and Pareek, A.. “Short-Term Trading and Stock Return Anomalies: Momentum, Reversal, and Share Issuance.” Review of Finance, 19 (2015), 1649–1701.Google Scholar
Da, Z.; Gurun, U. G.; and Warachka, M.. “Frog in the Pan: Continuous Information and Momentum.” Review of Financial Studies, 27 (2014), 2171–2218.Google Scholar
Daniel, K.; Hirshleifer, D.; and Subrahmanyam, A.. “Investor Psychology and Security Market Under-and Overreactions.” Journal of Finance, 53 (1998), 1839–1885.Google Scholar
Daniel, K., and Moskowitz, T.. “Momentum Crashes.” Journal of Financial Economics, 122 (2016), 221–247.Google Scholar
Daniel, K., and Titman, S.. “Evidence on the Characteristics of Cross Sectional Variation in Stock Returns.” Journal of Finance, 52 (1997), 1–33.Google Scholar
Eisdorfer, A.“Delisted Firms and Momentum Profits.” Journal of Financial Markets, 11 (2008), 160–179.Google Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Gervais, S., and Odean, T.. “Learning to Be Overconfident.” Review of Financial Studies, 14 (2001), 1–27.Google Scholar
Glaser, M., and Weber, M.. “Which Past Returns Affect Trading Volume?” Journal of Financial Markets, 12 (2009), 1–31.CrossRefGoogle Scholar
Gould, J. F., and Kleidon, A. W.. “Market Maker Activity on NASDAQ: Implications for Trading Volume.” Stanford Journal of Law, Business and Finance, 1 (1994), 1–17.Google Scholar
Griffin, J. M.; Ji, X.; and Martin, J. S.. “Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole.” Journal of Finance, 58 (2003), 2515–2547.Google Scholar
Grinblatt, M., and Han, B.. “Prospect Theory, Mental Accounting, and Momentum.” Journal of Financial Economics, 78 (2005), 311–339.Google Scholar
Grinblatt, M., and Keloharju, M.. “Sensation Seeking, Overconfidence, and Trading Activity.” Journal of Finance, 64 (2009), 549–578.Google Scholar
Grinblatt, M., and Moskowitz, T. J.. “Predicting Stock Price Movements from Past Returns: The Role of Consistency and Tax-Loss Selling.” Journal of Financial Economics, 71 (2004), 541–579.Google Scholar
Hou, K.; Peng, L.; and Xiong, W.. “A Tale of Two Anomalies: The Implications of Investor Attention for Price and Earnings Momentum.” Working Paper, Ohio State University (2008).Google Scholar
Hwang, B. H.“Distinguishing Behavioral Models of Momentum.” Working Paper, Cornell University (2010).Google Scholar
Jegadeesh, N.“Evidence of Predictable Behavior of Security Returns.” Journal of Finance, 45 (1990), 881–898.Google Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.Google Scholar
Jegadeesh, N., and Titman, S.. “Profitability of Momentum Strategies: An Evaluation of Possible Explanations.” Journal of Finance, 56 (2001), 699–720.Google Scholar
Kitayama, S.; Takagi, H.; and Matsumoto, H.. “Causal Attribution of Success and Failure: Cultural Psychology of the Japanese Self.” Japanese Psychological Review, 38 (1995), 247–280.Google Scholar
Lee, C. M. C., and Swaminathan, B.. “Price Momentum and Trading Volume.” Journal of Finance, 55 (2000), 2017–2069.Google Scholar
Lehmann, B. N.“Fads, Martingales, and Market Efficiency.” Quarterly Journal of Economics, 105 (1990), 1–28.Google Scholar
Miller, D. T.“Ego-Involvement and Attributions for Success and Failure.” Journal of Personality and Social Psychology, 34 (1976), 901–906.Google Scholar
Newey, W., and West, K.. “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Odean, T.“Volume, Volatility, Price, and Profit When All Traders Are above Average.” Journal of Finance, 53 (1998), 1887–1934.Google Scholar
Rouwenhorst, K. G.“International Momentum Strategies.” Journal of Finance, 53 (1998), 267–284.Google Scholar
Rouwenhorst, K. G.“Local Return Factors and Turnover in Emerging Stock Markets.” Journal of Finance, 54 (1999), 1439–1464.Google Scholar
Sicoly, F., and Ross, M.. “Facilitation of Ego-Biased Attributions by Means of Self-Serving Observer Feedback.” Journal of Personality and Social Psychology, 35 (1977), 734–741.Google Scholar
Statman, M.; Thorley, S.; and Vorkink, K.. “Investor Overconfidence and Trading Volume.” Review of Financial Studies, 19 (2006), 1531–1565.Google Scholar
Stevens, L., and Jones, E. E.. “Defensive Attribution and the Kelley Cube.” Journal of Personality and Social Psychology, 34 (1976), 809–820.Google Scholar