Overreaction of Exchange-Traded Funds During the Bubble of 1998–2002

Madura, Jeff; Richie, Nivine

doi:10.4337/9781849809108.00013

Cited by 26 publications

(21 citation statements)

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“…To study the concepts of underreaction and overreaction, Madura and Richie (2004) performed a statistical study on the daily opening and closing prices of exchange traded funds (ETFs) during the time period August 1998 to August 2002. They define underreaction as positive (alternatively, negative) cumulative abnormal returns following large positive (alternatively, negative) price movements.…”

Section: Introductionmentioning

confidence: 99%

Stock price dynamics: nonlinear trend, volume, volatility, resistance and money supply

Caginalp

DeSantis

2011

Quantitative Finance

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We present a methodology to study a data set of 119 260 daily closed-end fund prices using mixed-effects regressions with the objective of understanding price dynamics. There is strong statistical support that relative price change depends significantly on (i) the recent trend in a nonlinear manner, (ii) recent changes in valuation, (iii) recent changes in money supply (M2), (iv) longer-term trend, (v) recent volume changes and (vi) proximity to a recent high price. The dependence on the volatility is more subtle, as short-term volatility has a positive influence, while the longer term is negative. The cubic nonlinearity in the weighted price trend shows that a percentage daily gain of up to 2.78% tends to yield higher prices, but larger gains lead to lower prices. Thus, the nonlinearity of price trend establishes an empirical and quantitative basis for both underreaction and overreaction within one large data set, facilitating an understanding of these competing motivations in markets. Increasing money supply is found to have a significant positive effect on stock price, while proximity to recent high prices has a negative effect. The data set consists of daily prices during the period 26 October 1998 to 30 January 2008.Asset price dynamics, Momentum, Price trend, Money supply, Liquidity, Volume,

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Section: Introductionmentioning

confidence: 99%

Stock price dynamics: nonlinear trend, volume, volatility, resistance and money supply

Caginalp

DeSantis

2011

Quantitative Finance

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“…However, the industry indexes that they assessed were not tradable over the 1963-1995 period that was used to conduct the analysis. Madura and Richie (2004) find that large one-day price movements of ETFs reflect overreaction, but these results can not be used to generalize about momentum of ETFs over longer term periods.…”

Section: Price Momentum Effects On Etfsmentioning

confidence: 65%

Pricing behavior of exchange traded funds

Madura

Ngo

2007

J Econ Finan

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“…A steady trend in prices is usually seen as evidence of underreaction whereby investors are slow to assimilate and act upon new information that arrives into the market stochastically. Overreaction is essentially the opposite effect whereby traders bid up prices excessively as positive information enters the market, and analogously for negative information (Bremmer and Sweeney, 2001;Madura and Richie, 2004;Sturm, 2003).…”

Section: Quantifying Behavioral Factorsmentioning

confidence: 99%

“…Moreover, studies have also identified phenomena such as underreaction and overreaction in asset prices. Bremer and Sweeney (1991), Madura and Richie (2004), Sturm (2003) define underreaction (overreaction) as positive (negative) returns following large positive price movements and negative (positive) returns following large negative price movements.…”

Section: Price Trendmentioning

confidence: 99%

Nonlinear price dynamics of S&P 100 stocks

Caginalp

DeSantis

2020

Physica A: Statistical Mechanics and its Applications

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The methodology presented provides a quantitative way to characterize investor behavior and price dynamics within a particular asset class and time period. The methodology is applied to a data set consisting of over 250,000 data points of the S&P 100 stocks during 2004-2018. Using a two-way fixed-effects model, we uncover trader motivations including evidence of both under-and overreaction within a unified setting. A nonlinear relationship is found between return and trend suggesting a small, positive trend increases the return, while a larger one tends to decrease it. The shape parameters of the nonlinearity quantify trader motivation to buy into trends or wait for bargains. The methodology allows the testing of any behavioral finance bias or technical analysis concept.

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Overreaction of Exchange-Traded Funds During the Bubble of 1998–2002

Cited by 26 publications

References 0 publications

Stock price dynamics: nonlinear trend, volume, volatility, resistance and money supply

Stock price dynamics: nonlinear trend, volume, volatility, resistance and money supply

Pricing behavior of exchange traded funds

Nonlinear price dynamics of S&P 100 stocks

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