IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v65y2020ics1042443120300780.html
   My bibliography  Save this article

The prevalence of price overreactions in the cryptocurrency market

Author

Listed:
  • Borgards, Oliver
  • Czudaj, Robert L.

Abstract

This paper examines the prevalence of price overreactions for twelve cryptocurrencies compared to the US stock market. For this purpose, we implement a dynamic modeling approach to define and test for overreactions for interday and various intraday price levels. We find evidence that price overreactions are highly prevalent in the cryptocurrency market for all frequencies, strongly supporting the overreaction hypothesis. This result is largely comparable for cryptocurrency and stock markets despite the fact that both markets are fundamentally different. However, the returns of an overreaction trading strategy are significantly higher for cryptocurrencies due to larger overreactions as the most important factor for profitability. In addition, our results also show that negative overreactions are slightly more prevalent than positive overreactions.

Suggested Citation

  • Borgards, Oliver & Czudaj, Robert L., 2020. "The prevalence of price overreactions in the cryptocurrency market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:intfin:v:65:y:2020:i:c:s1042443120300780
    DOI: 10.1016/j.intfin.2020.101194
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443120300780
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2020.101194?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. J. Wang & B. M. Burton & D. M. Power, 2004. "Analysis of the overreaction effect in the Chinese stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 437-442.
    2. Himmelmann, A. & Schiereck, D. & Simpson, M. & Zschoche, M., 2012. "Long-term Reactions to Large Stock Price Declines and Increases in the European Stock Market: A Note on Market Efficiency," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 56463, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    3. Nerissa C. Brown & Kelsey D. Wei & Russ Wermers, 2014. "Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices," Management Science, INFORMS, vol. 60(1), pages 1-20, January.
    4. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2019. "Long-term price overreactions: are markets inefficient?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 657-680, October.
    5. Mynhardt, H. R. & Plastun, Alex, 2013. "The Overreaction Hypothesis: The Case of Ukrainian Stock Market," MPRA Paper 58941, University Library of Munich, Germany.
    6. Urquhart, Andrew, 2018. "What causes the attention of Bitcoin?," Economics Letters, Elsevier, vol. 166(C), pages 40-44.
    7. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
    8. Ising, J. & Schiereck, D. & Simpson, M. & Thomas, T. W., 2006. "Stock Returns Following Large One-month Declines and Jumps: Evidendence of Overoptimism in the German Market," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35059, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    9. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    10. Spyros Spyrou & Konstantinos Kassimatis & Emilios Galariotis, 2007. "Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 17(3), pages 221-235.
    11. Guglielmo Maria Caporale & Alex Plastun, 2019. "Price overreactions in the cryptocurrency market," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(5), pages 1137-1155, August.
    12. Alonso, Aurora & Rubio, Gonzalo, 1990. "Overreaction in the Spanish equity market," Journal of Banking & Finance, Elsevier, vol. 14(2-3), pages 469-481, August.
    13. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    14. Ising, Jan & Schiereck, Dirk & Simpson, Marc W. & Thomas, Thomas W., 2006. "Stock returns following large 1-month declines and jumps: Evidence of overoptimism in the German market," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(4), pages 598-619, September.
    15. Giudici, Paolo & Abu-Hashish, Iman, 2019. "What determines bitcoin exchange prices? A network VAR approach," Finance Research Letters, Elsevier, vol. 28(C), pages 309-318.
    16. 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.
    17. Kassimatis, Konstantinos & Spyrou, Spyros & Galariotis, Emilios, 2008. "Short-term patterns in government bond returns following market shocks: International evidence," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 903-924, December.
    18. Klein, Tony & Pham Thu, Hien & Walther, Thomas, 2018. "Bitcoin is not the New Gold – A comparison of volatility, correlation, and portfolio performance," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 105-116.
    19. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    20. Antonios Antoniou & Emilios C. Galariotis & Spyros I. Spyrou, 2005. "Contrarian Profits and the Overreaction Hypothesis: the Case of the Athens Stock Exchange," European Financial Management, European Financial Management Association, vol. 11(1), pages 71-98, January.
    21. David Michayluk & Karyn L. Neuhauser, 2006. "Investor Overreaction During Market Declines: Evidence From The 1997 Asian Financial Crisis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(2), pages 217-234, June.
    22. Aigbe Akhigbe & Thomas Gosnell & T. Harikumar, 1998. "Winners And Losers On Nyse: A Re‐Examination Using Daily Closing Bid‐Ask Spreads," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(1), pages 53-64, March.
    23. Trimborn, Simon & Härdle, Wolfgang Karl, 2018. "CRIX an Index for cryptocurrencies," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 107-122.
    24. Borri, Nicola, 2019. "Conditional tail-risk in cryptocurrency markets," Journal of Empirical Finance, Elsevier, vol. 50(C), pages 1-19.
    25. Gülin Vardar & Berna Okan, 2008. "Short Term Overreaction Effect: Evidence on the Turkish Stock Market," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Oguz Esen & Ayla Ogus (ed.), Proceedings of the Conference on Emerging Economic Issues in a Globalizing World, pages 155-165, Izmir University of Economics.
    26. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    27. Mehdian, Seyed & Nas, Tevfik & Perry, Mark J., 2008. "An examination of investor reaction to unexpected political and economic events in Turkey," Global Finance Journal, Elsevier, vol. 18(3), pages 337-350.
    28. Allen M. Poteshman, 2001. "Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market," Journal of Finance, American Finance Association, vol. 56(3), pages 851-876, June.
    29. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    30. Lasfer, M. Ameziane & Melnik, Arie & Thomas, Dylan C., 2003. "Short-term reaction of stock markets in stressful circumstances," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 1959-1977, October.
    31. Adam Zawadowski & Gyorgy Andor & Janos Kertesz, 2006. "Short-term market reaction after extreme price changes of liquid stocks," Quantitative Finance, Taylor & Francis Journals, vol. 6(4), pages 283-295.
    32. Michael Wong, 1997. "Abnormal Stock Returns Following Large One-day Advances and Declines: Evidence from Asia-Pacific Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 4(2), pages 171-177, May.
    33. Ray R. Sturm, 2014. "A Turning Point Method For Measuring Investor Sentiment," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 15(1), pages 30-42, January.
    34. Cox, Don R & Peterson, David R, 1994. "Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance," Journal of Finance, American Finance Association, vol. 49(1), pages 255-267, March.
    35. Achim Himmelmann & Dirk Schiereck & Marc Simpson & Moritz Zschoche, 2012. "Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(2), pages 400-423, April.
    36. Himmelmann, A. & Schiereck, D. & Simpson, M. & Zschoche, M., 2012. "Long-term Reactions to Large Stock Price Declines and Increases in the European Stock Market: A Note on Market Efficiency," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 60412, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    37. 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.
    38. da Costa, Newton Jr., 1994. "Overreaction in the Brazilian stock market," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 633-642, September.
    39. Fuertes, Ana-Maria & Thomas, Dylan C., 2006. "Large market shocks and abnormal closed-end-fund price behaviour," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2517-2535, September.
    40. Brown, Keith C. & Harlow, W. V. & Tinic, Seha M., 1988. "Risk aversion, uncertain information, and market efficiency," Journal of Financial Economics, Elsevier, vol. 22(2), pages 355-385, December.
    41. Ray Ball, 2009. "The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(4), pages 8-16, September.
    42. Roberto C. Gutierrez & Eric K. Kelley, 2008. "The Long‐Lasting Momentum in Weekly Returns," Journal of Finance, American Finance Association, vol. 63(1), pages 415-447, February.
    43. Zarowin, Paul, 1989. " Does the Stock Market Overreact to Corporate Earnings Information?," Journal of Finance, American Finance Association, vol. 44(5), pages 1385-1399, December.
    44. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    45. Manuel Ammann & Stephan Markus Kessler, 2009. "Intraday characteristics of stock price crashes," Applied Financial Economics, Taylor & Francis Journals, vol. 19(15), pages 1239-1255.
    46. Youguo Liang & Donald J. Mullineaux, 1994. "Overreaction And Reverse Anticipation: Two Related Puzzles?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(1), pages 31-43, March.
    47. Stephen J. Larson & Jeff Madura, 2003. "What Drives Stock Price Behavior Following Extreme One‐Day Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(1), pages 113-127, March.
    48. Bremer, Marc & Sweeney, Richard J, 1991. "The Reversal of Large Stock-Price Decreases," Journal of Finance, American Finance Association, vol. 46(2), pages 747-754, June.
    49. Blackburn, Douglas W. & Cakici, Nusret, 2017. "Overreaction and the cross-section of returns: International evidence," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 1-14.
    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. Iqbal, Najaf & Fareed, Zeeshan & Wan, Guangcai & Shahzad, Farrukh, 2021. "Asymmetric nexus between COVID-19 outbreak in the world and cryptocurrency market," International Review of Financial Analysis, Elsevier, vol. 73(C).
    2. Zaremba, Adam & Bilgin, Mehmet Huseyin & Long, Huaigang & Mercik, Aleksander & Szczygielski, Jan J., 2021. "Up or down? Short-term reversal, momentum, and liquidity effects in cryptocurrency markets," International Review of Financial Analysis, Elsevier, vol. 78(C).
    3. Gambarelli, Luca & Marchi, Gianluca & Muzzioli, Silvia, 2023. "Hedging effectiveness of cryptocurrencies in the European stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    4. Saggu, Aman, 2022. "The Intraday Bitcoin Response to Tether Minting and Burning Events: Asymmetry, Investor Sentiment, and “Whale Alerts” on Twitter," Finance Research Letters, Elsevier, vol. 49(C).
    5. Borgards, Oliver & Czudaj, Robert L., 2021. "Features of overreactions in the cryptocurrency market," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 31-48.
    6. Borgards, Oliver & Czudaj, Robert L. & Hoang, Thi Hong Van, 2021. "Price overreactions in the commodity futures market: An intraday analysis of the Covid-19 pandemic impact," Resources Policy, Elsevier, vol. 71(C).
    7. Almeida, José & Gonçalves, Tiago Cruz, 2023. "A systematic literature review of investor behavior in the cryptocurrency markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    8. Tang, Tao & Wang, Yanchen, 2022. "Liquidity Shocks, Price Volatilities, and Risk-managed Strategy: Evidence from Bitcoin and Beyond," Journal of Multinational Financial Management, Elsevier, vol. 64(C).
    9. Borgards, Oliver, 2021. "Dynamic time series momentum of cryptocurrencies," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    10. Lamia Kalai, 2022. "Time Varying Dependence in the Cryptocurrency Market and COVID 19 Panic Index: An Empirical Investigation," International Journal of Economics and Financial Issues, Econjournals, vol. 12(2), pages 37-51, March.
    11. Natashya NATASHYA & Yanuar Nanok SOENARNO, 2022. "How Quarterly Reports Support the Market," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 3(9), pages 55-61, September.

    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. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    2. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2018. "Short-Term Price Overreactions: Identification, Testing, Exploitation," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 913-940, April.
    3. Piccoli, Pedro & Chaudhury, Mo & Souza, Alceu, 2017. "How do stocks react to extreme market events? Evidence from Brazil," Research in International Business and Finance, Elsevier, vol. 42(C), pages 275-284.
    4. Boubaker, Sabri & Farag, Hisham & Nguyen, Duc Khuong, 2015. "Short-term overreaction to specific events: Evidence from an emerging market," Research in International Business and Finance, Elsevier, vol. 35(C), pages 153-165.
    5. Srikanth Parthasarathy & Kannadas Sendilvelu, 2022. "On Stock Return Patterns Following Large Monthly Price Movements: Empirical Evidence from India," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 249-268.
    6. Guglielmo Maria Caporale & Alex Plastun, 2020. "Momentum effects in the cryptocurrency market after one-day abnormal returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 251-266, September.
    7. Plastun, Alex & Sibande, Xolani & Gupta, Rangan & Wohar, Mark E., 2021. "Evolution of price effects after one-day abnormal returns in the US stock market," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    8. Mazouz, Khelifa & Joseph, Nathan Lael & Palliere, Clement, 2009. "Stock index reaction to large price changes: Evidence from major Asian stock indexes," Pacific-Basin Finance Journal, Elsevier, vol. 17(4), pages 444-459, September.
    9. Dyl, Edward A. & Yuksel, H. Zafer & Zaynutdinova, Gulnara R., 2019. "Price reversals and price continuations following large price movements," Journal of Business Research, Elsevier, vol. 95(C), pages 1-12.
    10. Dumitriu, Ramona & Stefanescu, Razvan & Nistor, Costel, 2012. "Reactions of the capital markets to the shocks before and during the global crisis," MPRA Paper 41540, University Library of Munich, Germany, revised 10 Jan 2012.
    11. Razvan Stefanescu & Ramona Dumitriu, 2016. "Contrarian and Momentum Profits during Periods of High Trading Volume preceded by Stock Prices Shocks," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 378-384.
    12. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2019. "Long-term price overreactions: are markets inefficient?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 657-680, October.
    13. Asiya Sohail & Attiya Yasmin Javid, 2014. "The Global Financial Crisis and Investors’ Behaviour; Evidence from the Karachi Stock Exchange," PIDE-Working Papers 2014:106, Pakistan Institute of Development Economics.
    14. Lobe, Sebastian & Rieks, Johannes, 2011. "Short-term market overreaction on the Frankfurt stock exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 113-123, May.
    15. Achim Himmelmann & Dirk Schiereck & Marc Simpson & Moritz Zschoche, 2012. "Long-term reactions to large stock price declines and increases in the European stock market: a note on market efficiency," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(2), pages 400-423, April.
    16. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, September.
    17. Vinicius Ratton Brandi, 2020. "Short-Term Predictability of Stock Market Indexes following Large Drawdowns and Drawups," Working Papers Series 529, Central Bank of Brazil, Research Department.
    18. 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.
    19. Mynhardt, H. R. & Plastun, Alex, 2013. "The Overreaction Hypothesis: The Case of Ukrainian Stock Market," MPRA Paper 58941, University Library of Munich, Germany.
    20. Hisham Farag, 2014. "Investor overreaction and unobservable portfolios: evidence from an emerging market," Applied Financial Economics, Taylor & Francis Journals, vol. 24(20), pages 1313-1322, October.

    More about this item

    Keywords

    Cryptocurrency; Overreaction; Mean reversion; Turning point; Stock market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

    Statistics

    Access and download statistics

    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:eee:intfin:v:65:y:2020:i:c:s1042443120300780. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    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.