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Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange

Author

Listed:
  • Spyros I. Spyrou
  • Konstantinos Kassimatis
  • Emilios C. C Galariotis

    (Durham Business School - Durham University)

Abstract

We examine short-term investor reaction to extreme events in the UK equity market for the period 1989 to 2004 and find that the market reaction to shocks for large capitalization stock portfolios is consistent with the Efficient Market Hypothesis, i.e. all information appears to be incorporated in prices on the same day. However, for medium and small capitalization stock portfolios our results indicate significant underreaction to both positive and negative shocks for many days subsequent to a shock. Furthermore, the underreaction is not explained by risk factors (e.g. Fama and French, 1996) calendar effects, bid-ask biases or unique global financial crises.

Suggested Citation

  • Spyros I. Spyrou & Konstantinos Kassimatis & Emilios C. C Galariotis, 2007. "Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange," Post-Print hal-01096009, HAL.
    • Handle: RePEc:hal:journl:hal-01096009
    DOI: 10.1080/09603100600639868
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    Cited by:

    1. Maher, Daniela & Parikh, Anokhi, 2011. "Short-term under/overreaction, anticipation or uncertainty avoidance? Evidence from India," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 560-584, October.
    2. Hudson, Robert S. & Gregoriou, Andros, 2015. "Calculating and comparing security returns is harder than you think: A comparison between logarithmic and simple returns," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 151-162.
    3. Senarathne Chamil W. & Long Wei, 2019. "Industry Competition and Common Stock Returns," Management Sciences. Nauki o Zarządzaniu, Sciendo, vol. 24(3), pages 24-35, September.
    4. 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.
    5. 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.
    6. 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.
    7. Hung-Wen Lin & Kun-Ben Lin & Jing-Bo Huang & Shu-Heng Chen, 2021. "Timely Loss Recognition Helps Nothing," Sustainability, MDPI, vol. 13(14), pages 1-24, July.
    8. Galariotis, Emilios C. & Holmes, Phil & Ma, Xiaodong S., 2007. "Contrarian and momentum profitability revisited: Evidence from the London Stock Exchange 1964-2005," Journal of Multinational Financial Management, Elsevier, vol. 17(5), pages 432-447, December.
    9. 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.
    10. Chamil W SENARATHNE & Wei JIANGUO, 2020. "Testing for Heteroskedastic Mixture of Ordinary Least Squares Errors," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 73-91, July.
    11. 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).
    12. Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2012. "Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE," MPRA Paper 41555, University Library of Munich, Germany, revised 25 Sep 2012.
    13. 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.
    14. 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.
    15. Sturm, Philipp, 2013. "Operational and reputational risk in the European banking industry: The market reaction to operational risk events," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 191-206.
    16. Bachar FAKHRY, 2016. "A Literature Review of Behavioural Finance," Journal of Economics Library, KSP Journals, vol. 3(3), pages 458-465, September.

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