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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

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

Suggested Citation

  • Chaoshin Chiao & David Cheng & Welfeng Hung, 2005. "Overreaction after Controlling for Size and Book-to-Market Effects and its Mimicking Portfolio in Japan," Review of Quantitative Finance and Accounting, Springer, vol. 24(1), pages 65-91, January.
  • Handle: RePEc:kap:rqfnac:v:24:y:2005:i:1:p:65-91
    DOI: 10.1007/s11156-005-5327-4
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    Cited by:

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

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    Keywords

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

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