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Continuing Overreaction and Stock Return Predictability

Author

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  • Byun, Suk Joon
  • Lim, Sonya S.
  • Yun, Sang Hyun

Abstract

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.

Suggested Citation

  • Byun, Suk Joon & Lim, Sonya S. & Yun, Sang Hyun, 2016. "Continuing Overreaction and Stock Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(6), pages 2015-2046, December.
    • Handle: RePEc:cup:jfinqa:v:51:y:2016:i:06:p:2015-2046_00
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    Cited by:

    1. Chai, Daniel & Chiah, Mardy & Zhong, Angel & Li, Bob, 2022. "Another look at sources of momentum profits," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 310-323.
    2. Bennett, Donyetta & Mekelburg, Erik & Williams, T.H., 2023. "BeFi meets DeFi: A behavioral finance approach to decentralized finance asset pricing," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. Mehmet F. Dicle, 2019. "Increasing return response to changes in risk," Review of Financial Economics, John Wiley & Sons, vol. 37(1), pages 197-215, January.
    4. Hong‐Yi Chen & Pin‐Huang Chou & Chia‐Hsun Hsieh, 2018. "Persistency of the momentum effect," European Financial Management, European Financial Management Association, vol. 24(5), pages 856-892, November.
    5. Chaonan Lin & Nien‐Tzu Yang & Robin K. Chou & Kuan‐Cheng Ko, 2022. "A timing momentum strategy," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1339-1379, April.
    6. Chen, Tsung-Yu & Chou, Pin-Huang & Hsieh, Chia-Hsun & Ghon Rhee, S., 2021. "Momentum life cycle, revisited," Journal of Banking & Finance, Elsevier, vol. 127(C).
    7. Chang, Rosita P. & Ko, Kuan-Cheng & Nakano, Shinji & Ghon Rhee, S., 2018. "Residual momentum in Japan," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 283-299.
    8. Galariotis, Emilios & Li, Bob & Chai, Daniel, 2019. "Down but not out: Plenty of returns available for shorted down stocks," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 296-306.
    9. Xuebing Yang & Huilan Zhang, 2023. "Evolution of short-term contrarian profits," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 41(1), pages 1-27, July.
    10. Chen, Hong-Yi & Hsieh, Chia-Hsun & Lee, Cheng-Few, 2023. "Revisiting the momentum effect in Taiwan: The role of persistency," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    11. Yang, Nien-Tzu & Chu, Hsiang-Hui & Ko, Kuan-Cheng & Lee, Shiou-Wen, 2018. "Continuing overreaction and momentum in a market with price limits," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 56-71.
    12. Ming-Yu Liu & Chiuling Lu, 2020. "The Continuing Overreaction in the REIT Market," The Journal of Real Estate Finance and Economics, Springer, vol. 61(1), pages 129-149, June.
    13. Ho, Kung-Cheng & Yang, Lu & Luo, Sijia, 2022. "Information disclosure ratings and continuing overreaction: Evidence from the Chinese capital market," Journal of Business Research, Elsevier, vol. 140(C), pages 638-656.
    14. Li, Zhuo & Wen, Fenghua & Huang, Zhijian James, 2023. "Asymmetric response to earnings news across different sentiment states: The role of cognitive dissonance," Journal of Corporate Finance, Elsevier, vol. 78(C).
    15. Nick Inglis & Bruce Vanstone & Tobias Hahn, 2019. "Modelling momentum winner/loser asymmetry: the sources of winner and loser returns in the ASX200 and S&P500," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(S1), pages 657-684, April.
    16. Lim, Bryan Y. & Wang, Jiaguo (George) & Yao, Yaqiong, 2018. "Time-series momentum in nearly 100 years of stock returns," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 283-296.
    17. Xiong, Tao & Wang, Peng, 2023. "Institutional ownership and momentum in the Chinese A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    18. Ho, Hsiao-Wei & Hsiao, Yu-Jen & Lo, Wen-Chi & Yang, Nien-Tzu, 2023. "Momentum investing and a tale of intraday and overnight returns: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    19. Tsung‐Yu Chen & Guan‐Ying Huang & Zhen‐Xing Wu, 2022. "Overreaction‐based momentum in the real estate investment trust market," International Review of Finance, International Review of Finance Ltd., vol. 22(3), pages 453-471, September.
    20. Khasawneh, Maher & McMillan, David G. & Kambouroudis, Dimos, 2024. "Left-tail risk and UK stock return predictability: Underreaction, overreaction, and arbitrage difficulties," International Review of Financial Analysis, Elsevier, vol. 95(PA).

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