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Overreaction in Trading

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  • Justin Morscheck

Abstract

Using intraday trading data during the 2008 financial crisis, from the Standard and Poor’s Depository Receipt (SPDR) market, we test for evidence of the informational advantage of traders. In addition, we examine the effect of pricing error on trade price. If traders are rational, and have accurate information, they will only purchase an asset at a premium (discount) if they have reason to believe that the fundamental value of that asset will increase (decrease). Our results show that the trading price of the SPDR does not significantly predict the movement of underlying asset values. This finding is consistent with traders overreacting to disparities between price and underlying value during the financial crisis.

Suggested Citation

  • Justin Morscheck, 2018. "Overreaction in Trading," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 7(4), pages 21-37, October.
    • Handle: RePEc:rbs:ijfbss:v:7:y:2018:i:4:id:196
    DOI: 10.20525/ijfbs.v7i4.196
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    References listed on IDEAS

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    1. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    2. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
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