Overreaction evidence from large-cap stocks

Abstract

International audienceThe purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers’ gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed.Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart’s (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy.The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios’ alphas are significant, suggesting that the CAPM and the multifactor models are unable to explain return differentials between winners and losers. Our evidence supports two main conclusions. First, stock market overreaction still holds for a sample of large firms. Second, this is robust to the Fama and French’s (1993, 1996) three-factor model and Carhart’s (1997) momentum portfolio. Findings emphasize the relevance of a contrarian strategy when rebalancing investment portfolios.Portfolio managers can improve stock returns by selling past winners and buying previous loser large-cap US stocks.This paper is the first, to the authors’ knowledge, to examine frequently traded large-cap US stocks to avoid infrequent trading and size concerns

Overreaction and underreaction anomalies in the Indonesian stock market: a sectoral analysis

“…Our findings on the presences of overreaction and underreaction in the Indonesian stock market was very much in line with the previous studies in the stock markets of the USA (Abebe Assefa et al , 2014; Chung et al , 2015; Piccoli et al , 2017), Europe (Bessière and Elkemali, 2014), Australia (Durand, 2013), India (Ansari and Khan, 2012; Maheshwari and Dhankar, 2017), Mauritius (Subadar Agathee, 2012), Egypt (Boubaker et al , 2015) and China (Zainudin and Hussin, 2015). Similarly, these empirical findings also confirmed the earlier findings on the presence of the anomaly in the Indonesian stock market (Sumiyana, 2009; Octavio and Lantara, 2014; Faisal and Majid, 2016; Andriansyah, 2017).…”

“…Abebe Assefa et al (2014) assess the performance of a contrarian investment strategy focussing on frequently traded large-cap US stocks. The study documents the asymmetric performance following portfolio formation.…”

“…In the advanced stock markets, the studies on the overreaction anomaly have been investigated by Abebe Assefa et al (2014); Chung et al (2015) and Piccoli et al (2017) in the USA; Bessière and Elkemali (2014) in Europe; and Durand et al (2013) in Australia. Abebe Assefa et al (2014) found stock market overreaction for a sample of the large US firms; thus, the contrarian strategy was relevant to rebalancing investment portfolios into this market.…”

“…In the advanced stock markets, the studies on the overreaction anomaly have been investigated by Abebe Assefa et al (2014); Chung et al (2015) and Piccoli et al (2017) in the USA; Bessière and Elkemali (2014) in Europe; and Durand et al (2013) in Australia. Abebe Assefa et al (2014) found stock market overreaction for a sample of the large US firms; thus, the contrarian strategy was relevant to rebalancing investment portfolios into this market. The existence of the overreaction anomaly in the US stock market during the 1973-2005 period was specific to the earlier period and results from the inefficient incorporation of information into prices, largely attributable to an environment with high barriers to arbitrage.…”

Analisis Abnormal Return Portofolio Winner - Loser Pada Perusahaan Yang Terdaftar Di Indeks Kompas 100

“…Pembalikan yang terjadi pada saham kategori winner jauh lebih ekstrem dibandingkan dengan saham kategori loser sehingga menunjukkan terjadinya reversal effect dengan hasil untuk kategori saham loser positif signifikan. (Assefa, Esqueda, & Galariotis, 2014) juga menemukan hal yang serupa dimana Terdapat asimetri dalam penilaian portofolio formasi dengan hasil portofolio winner loser selama periode formasi, saham loser mengungguli saham winner dengan perbedaan 29,2% selama 36 bulan setelah periode formasi. (Aulia, Nadhira Nur, 2016)dalam penelitian yang berjudul Analisis Abnormal Return Saham Winner -Loser untuk mengidentifikasi Price Reversal di Indeks LQ45 Periode 2014 -2015 menunjukkan bahwa terdapat fenomena price reversal yang ditandai dengan nilai cummulative average abnormal return saham winner pada formasi yang berbalik menjadi saham loser pada periode pengujian dan sebaliknya.…”