IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v24y2005i1p65-91.html
   My bibliography  Save this article

Overreaction after Controlling for Size and Book-to-Market Effects and its Mimicking Portfolio in Japan

Author

Listed:
  • Chaoshin Chiao
  • David Cheng
  • Welfeng Hung

Abstract

In this paper we observe that firm size (SZ) and book-to-market (BM) cannot fully explain stock returns on prior-return- (PR-) based portfolios in the Japanese stock market. The overreaction effect after controlling for the SZ and BM effects is significant and persistent, and accounts for a large part of the zero-investment returns on the loser to the winner. We therefore propose a new mimicking portfolio whose returns mimic the common factor in returns related to overreaction. Our evidence shows that the proposed four-factor model captures common variation in returns on portfolios, based on stocks’ SZ, BM, and PR, better than the well-known three-factor model does. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Chaoshin Chiao & David Cheng & Welfeng Hung, 2005. "Overreaction after Controlling for Size and Book-to-Market Effects and its Mimicking Portfolio in Japan," Review of Quantitative Finance and Accounting, Springer, vol. 24(1), pages 65-91, January.
    • Handle: RePEc:kap:rqfnac:v:24:y:2005:i:1:p:65-91
    DOI: 10.1007/s11156-005-5327-4
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11156-005-5327-4
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-005-5327-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    3. Jaffe, Jeffrey & Westerfield, Randolph, 1985. "Patterns in Japanese Common Stock Returns: Day of the Week and Turn of the Year Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(2), pages 261-272, June.
    4. La Porta, Rafael, et al, 1997. "Good News for Value Stocks: Further Evidence on Market Efficiency," Journal of Finance, American Finance Association, vol. 52(2), pages 859-874, June.
    5. Baytas, Ahmet & Cakici, Nusret, 1999. "Do markets overreact: International evidence," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1121-1144, July.
    6. repec:bla:jfinan:v:43:y:1988:i:2:p:507-28 is not listed on IDEAS
    7. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    8. De Bondt, Werner F M & Thaler, Richard H, 1987. "Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    9. Kato, Kiyoshi & Schallheim, James S., 1985. "Seasonal and Size Anomalies in the Japanese Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(2), pages 243-260, June.
    10. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    11. Jonathan B. Berk, 2000. "Sorting Out Sorts," Journal of Finance, American Finance Association, vol. 55(1), pages 407-427, February.
    12. Daniel, Kent & Titman, Sheridan, 1997. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, vol. 52(1), pages 1-33, March.
    13. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    14. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    15. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    16. Gunaratne, P. S. M. & Yonesawa, Y., 1997. "Return reversals in the Tokyo Stock Exchange: A test of stock market overreaction," Japan and the World Economy, Elsevier, vol. 9(3), pages 363-384, August.
    17. Chan, K C & Chen, Nai-Fu, 1991. "Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, vol. 46(4), pages 1467-1484, September.
    18. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    19. Narasimhan Jegadeesh & Sheridan Titman, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    20. Dechow, Patricia M. & Sloan, Richard G., 1997. "Returns to contrarian investment strategies: Tests of naive expectations hypotheses," Journal of Financial Economics, Elsevier, vol. 43(1), pages 3-27, January.
    21. repec:bla:jfinan:v:53:y:1998:i:3:p:1131-1147 is not listed on IDEAS
    22. Conrad, Jennifer & Kaul, Gautam, 1993. "Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March.
    23. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. "Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
    24. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    25. Chan, K C, 1988. "On the Contrarian Investment Strategy," The Journal of Business, University of Chicago Press, vol. 61(2), pages 147-163, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yuan Gao & Derek Oler, 2012. "Rumors and pre-announcement trading: why sell target stocks before acquisition announcements?," Review of Quantitative Finance and Accounting, Springer, vol. 39(4), pages 485-508, November.
    2. Douglas W. Blackburn & Nusret Cakici, 2020. "Tangible and intangible information in emerging markets," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1509-1527, May.
    3. J. Ernstberger & H. Haupt & O. Vogler, 2011. "The role of sorting portfolios in asset-pricing models," Applied Financial Economics, Taylor & Francis Journals, vol. 21(18), pages 1381-1396.
    4. Hisham Farag & Robert Cressy, 2010. "Do unobservable factors explain the disposition effect in emerging stock markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1173-1183.
    5. Robert Cressy & Hisham Farag, 2011. "Do size and unobservable company factors explain stock price reversals?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(1), pages 1-21, January.
    6. Nusret Cakici & Sris Chatterjee & Yi Tang & Lin Tong, 2021. "Alternative profitability measures and cross-section of expected stock returns: international evidence," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 369-391, January.
    7. Rani Hoitash & Murugappa (Murgie) Krishnan, 2008. "Herding, momentum and investor over-reaction," Review of Quantitative Finance and Accounting, Springer, vol. 30(1), pages 25-47, January.
    8. Hisham Farag, 2015. "Long-term Overreaction, Regulatory Policies and Stock Market Anomalies: Evidence from Egypt," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 112-139, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    2. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    3. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    4. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, April.
    5. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    6. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    7. Wu, Xueping, 2002. "A conditional multifactor analysis of return momentum," Journal of Banking & Finance, Elsevier, vol. 26(8), pages 1675-1696, August.
    8. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    9. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    10. Chiao, Chaoshin & Hueng, C. James, 2005. "Overreaction effects independent of risk and characteristics: evidence from the Japanese stock market," Japan and the World Economy, Elsevier, vol. 17(4), pages 431-455, December.
    11. Fernando Rubio, 2005. "Estrategias Cuantitativas De Valor Y Retornos Por Accion De Largo," Finance 0503029, University Library of Munich, Germany.
    12. Rocciolo, Francesco & Gheno, Andrea & Brooks, Chris, 2022. "Explaining abnormal returns in stock markets: An alpha-neutral version of the CAPM," International Review of Financial Analysis, Elsevier, vol. 82(C).
    13. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    14. Joachim Freyberger & Andreas Neuhierl & Michael Weber, 2020. "Dissecting Characteristics Nonparametrically," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2326-2377.
    15. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Rationalizing the value premium in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 51-70.
    16. Zura Kakushadze, 2015. "Heterotic Risk Models," Papers 1508.04883, arXiv.org, revised Jan 2016.
    17. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
    18. Da, Zhi & Guo, Re-Jin & Jagannathan, Ravi, 2012. "CAPM for estimating the cost of equity capital: Interpreting the empirical evidence," Journal of Financial Economics, Elsevier, vol. 103(1), pages 204-220.
    19. van Dijk, Mathijs A., 2011. "Is size dead? A review of the size effect in equity returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3263-3274.
    20. Sanjay Sehgal & Sakshi Jain & Pr Laurence the Porteu de la Morandiere, 2013. "Long-term Prior Return Patterns in Stock Returns: Evidence from Emerging Markets," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(2), pages 53-78.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:24:y:2005:i:1:p:65-91. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.