A General theory of Under-reaction and Overreaction in Stock Market
Date Issued
2005
Date
2005
Author(s)
Shen, Tzu-Chiao
DOI
en-US
Abstract
Abstract
Momentum strategy has survived many robust tests, but the existence of its accompanying reversal effects remains in dispute. In this research we modeled a market that contained three types of widely recognized investors: the rational investor, the disposition effect investor, and the trend chaser. Our model shows that if the disposition effect dominates the market, then the stock price under-reacts to news and causes an under-reaction. Conversely, if the trend chasing effect rules the market, then the stock price over-reacts to fundamental changes and this deviation induces a subsequent price reversal. Thus, the market composition of these two effects decides the price (return) patterns, as well as the price volatility relative to fundamental changes. Furthermore, we show that the high trading volume shortens the life of momentum profits, and unrealized capital gains are a less noisy predictor than past fundamental changes. Finally, we also present a simple way to distinguish whether the disposition effect or the trend chasing effect takes control of the market.
Subjects
錯置效果
市場模型
過度反應
動量策略
Disposition effect
Trend Chasing
Underreaction
Overreaction
Momentum
Reversal
Type
thesis