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

  • Chaoshin Chiao

    ()

  • David Cheng
  • Welfeng Hung
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    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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    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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