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Identifying Overreaction in Markets

In: Following the Crowd: Psychological Drivers of Herding and Market Overreaction

Author

Listed:
  • Kok Loang Ooi

    (Universiti Malaysia)

  • Norazlin Binti Ab Aziz

    (Universiti Malaysia)

  • Wee Yeap Lau

    (Universiti Malaysia)

Abstract

This chapter examines the phenomenon of overreaction in financial markets, primarily focusing on excessive price movements that deviate from their respective fundamental values, as well as the identification and measurement of these deviations. It presents preliminary alerts that reveal distorted prices, thereby enabling investors to forecast and react to market inefficiencies. Furthermore, the chapter examines data-driven methodologies for tracking overreaction patterns, utilising statistical and computational methods to distinguish between rational price adjustments and those driven by sentiment. Practical equipment for mitigating emotional and cognitive biases in the investment decision-making process is also mentioned, thereby allowing for a more comprehensive understanding of behavioural finance techniques, which can guide investors towards more disciplined and rational investing. The chapter presents a comprehensive framework for understanding and mitigating market overreactions through a detailed analysis, thereby contributing to informed and more effective investment practices.

Suggested Citation

  • Kok Loang Ooi & Norazlin Binti Ab Aziz & Wee Yeap Lau, 2025. "Identifying Overreaction in Markets," Springer Books, in: Following the Crowd: Psychological Drivers of Herding and Market Overreaction, chapter 0, pages 147-157, Springer.
    • Handle: RePEc:spr:sprchp:978-981-95-0792-4_11
    DOI: 10.1007/978-981-95-0792-4_11
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