A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets

Hong, Harrison; Stein, Jeremy C.

doi:10.3386/w6324

Cited by 787 publications

(945 citation statements)

References 33 publications

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“…If an investor who primarily speculates on private information buys (sells) the asset, reflecting the positive (negative) private information about the asset's future payoff, the subsequent price will rise (fall) (e.g., Llorente et al, 2001;Wang, 1994). When a trader underreacts (overreacts) to news, the resultant asset prices exhibit momentum (reversals) (e.g., Hong & Stein, 1999;Jegadeesh & Titman, 1993;Lakonishok et al, 1992). Although various empirical tests have been performed to study equity investor behavior and performance, the corresponding evidence in futures markets is scant.…”

Section: Introductionmentioning

confidence: 99%

The behavior and performance of major types of futures traders

Wang

2002

Journal of Futures Markets

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This article examines the behavior and performance of speculators and hedgers in 15 U.S. futures markets. We find that after controlling for market risk factors, speculators are contrarians, but respond positively to market sentiment. In contrast, hedgers engage in positive feedback trading and trade against market sentiment. We also find that trades of speculators (hedgers) are positively (negatively) correlated with subsequent abnormal returns; however, it does not appear that speculators possess superior forecasting power. Therefore, hedging pressure effects likely explain the negative relation between the performance of speculators and hedgers. The positive feedback trading by hedgers together with their negative performance suggests that hedgers have a destabilizing impact on futures prices.

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Section: Introductionmentioning

confidence: 99%

The behavior and performance of major types of futures traders

Wang

2002

Journal of Futures Markets

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“…In an efficient markets explanation, revealing the expected returns pattern should make no difference for the future path of expected returns; in a quasi-rational view such as the overreaction hypothesis represents, an explicit choice-theoretic basis is needed to predict public reaction to the uncovered profit opportunities. The work by Barberis, Shleifer, and Vishny (1998), Daniel, Hirshleifer, and Subrahmanyam (1998), and Hong and Stein (1999 has already made important strides in that direction. J=3,6,9,12; K=3,6,9,12) are the combinations of J and K originally examined by Jegadeesh and Titman (1993) for U.S. stock data.…”

Section: Resultsmentioning

confidence: 99%

Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study

Balvers

2002

SSRN Journal

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“…The relative outperformance of trend-following strategies may also be attributed to the presence of "momentum traders" as described in Hong and Stein (1999), who identify and profit from changing trends due to the arrival of price-sensitive news that may come in the market in the form of supply/demand shocks to the underlying commodity or freight markets. Their actions may also be motivated by the slow diffusion of information through trade reports or the network of brokers, owing to the lack of a centralized market mechanism as is the case in most financial markets.…”

Section: Resultsmentioning

confidence: 99%

Economic significance of market timing rules in the Forward Freight Agreement markets

Nomikos

Doctor

2013

Transportation Research Part E: Logistics and Transportation Re

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent repository link AbstractQuantitative market timing strategies have been traditionally tested in liquid commodity and financial futures, often with mixed results with respect to their performance. We extend this methodology to a nonstorable commodity, freight, where hitherto this analysis has not been carried out. The freight futures market is mature and increasingly liquid, making it a good case for diversification and trading opportunities. We carry out a comprehensive study of quantitative trading strategies in the FFA (Forward Freight Agreements) market on a wide variety of contracts and maturities with a number of trading rules. We find that in spite of robustness checks, trading rules do outperform the buy-and-hold benchmark in general. We also explore the possibility that illiquidity and a small sample size may impact the results of the tests and therefore offer an intuitive approach to mitigate their effects. A procedure that augments the Hansen (2005) SPA (Superior Predictive Ability) methodology and allows us to use it for smaller sample sizes with increased confidence is also proposed.

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A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets

Cited by 787 publications

References 33 publications

The behavior and performance of major types of futures traders

The behavior and performance of major types of futures traders

Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study

Economic significance of market timing rules in the Forward Freight Agreement markets

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