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

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  • Chaoshin Chiao

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  • David Cheng
  • Welfeng Hung
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    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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    Bibliographic 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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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

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

    References

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    Cited by:
    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.
    2. Robert Cressy & Hisham Farag, 2011. "Do size and unobservable company factors explain stock price reversals?," Journal of Economics and Finance, Springer, vol. 35(1), pages 1-21, January.

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