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

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Author Info
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

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File URL: http://hdl.handle.net/10.1007/s11156-005-5327-4
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 24 (2005)
Issue (Month): 1 (January)
Pages: 65-91
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Handle: RePEc:kap:rqfnac:v:24:y:2005:i:1:p:65-91

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Related research
Keywords: size; book-to-market; prior return; overreaction;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  3. 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. [Downloadable!] (restricted)
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    Other versions:
  15. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!] (restricted)
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