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Do Fixed-Income ETFs Overreact? Evidence of Short-term Predictability following Extreme Price Shocks

Author

Listed:
  • Júlio Lobão

    (Universidade do Porto - Faculdade de Economia do Porto. Porto. Portugal)

  • Ana Isabel Costa

    (Universidade do Porto - Faculdade de Economia do Porto. Porto. Portugal)

Abstract

This paper investigates the short-term price predictability of US fixed-income ETFs in reaction to one-day extreme returns. Based on an assessment of 582 extreme price movements of ETFs in the 2007-2014 period, we compare the normal hours returns (‘open-to-close’) and after-hours returns (‘close-to-open’) for a group of 87 ETFs. We find a stark contrast between what occurs in these two periods: on average only extreme returns that occur after-hours represent an overreaction, leading to a significant reversal in the following period. Our results suggest that markets during after-hours tend to be significantly more inefficient. These results carry important implications for both regulators and market practitioners.

Suggested Citation

  • Júlio Lobão & Ana Isabel Costa, 2020. "Do Fixed-Income ETFs Overreact? Evidence of Short-term Predictability following Extreme Price Shocks," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 43(122), pages 131-144, Mayo.
    • Handle: RePEc:cud:journl:v:43:y:2020:i:122:p:131-144
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    Cited by:

    1. Júlio Lobão & Maria Eva Jerke, 2020. "Short-term Overreaction in American Depository Receipts," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67(4), pages 423-435, December.

    More about this item

    Keywords

    Fixed-income exchange traded funds; Overreaction; Short-term return reversal; Price predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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