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Overreaction on the Tunisian Stock Market: An Empirical Test (Sur-Réaction Sur le Marché Tunisien des Actions: Une Investigation Empirique)
Abstract
L'objectif de cet article est d’étudier le comportement du portefeuille
d’arbitrage qui consiste à prendre simultanément une position
acheteur dans le portefeuille perdant et vendeur dans le portefeuille
gagnant.
... In sum, size and liquidity criteria are not sufficient conditions to display a martingale process. These results are consistent with markets where stock prices are not instantaneously adjusted to the influx of new information and often subject to pricing inefficiencies (Trabelsi, 2009). It is plausible that the outcome of return predictability is empirically validated overwhelmingly. ...
This research uses variance ratio analysis to test whether Middle Eastern, North African (MENA) and Pacific Basin emerging equity markets follow a martingale behavior during the period1980-2004. The conventional Lo and MacKinlay variance ratio test, the multiple variance ratio test of Chow and Denning, rank- and sign-based test of Wright, and wild bootstrap of Kim are used for the monthly return series. The problem of thin trading was addressed using Miller, Muthuswamy, and Whaley’s adjusting procedure. Results have shown traces of a martingale behavior at high holding horizons. However, overall conclusions indicate that the null martingale hypothesis is strongly rejected for the whole sample and considered sub-periods at a 5% significance level. The pattern of the variance ratio estimates signify that the selected stock markets exhibit persistent mean-reverting and predictable behavior in their monthly adjusted returns series. The results expose the ineffectiveness of economic liberalization and privatization measures implemented in the early 1990s to improve their market efficiency. The Asian crisis did not affect the outcomes of the variance ratio analysis. Moreover, it sounds as if the perceptible development in terms of size and liquidity was not sufficient to exhibit a martingale behavior in these markets.
... As for the European stock markets, we can mention the overreaction studies of Alonso and Rubio (1990) and Muga and Santamaría (2007) in Spain, Vermaelen and Vestringe (1986) in Belgium, Clare and Thomas (1995) in the UK, Maî (1995) and Simon (2003) in France. Others similar studies are made by Da Costa (1994) in Brazil, Chang et al. (1995) in Japan, Leung and Li (1998) and Otchere and Chan (2003) in Hong Kong, Gaunt (2000) in Australia, De Bondt andThaler (1985, 1987), Zarowin (1990) and Ma et al. (2005) in the USA and Trabelsi (2009) in Tunisia. These different abnormal return-generating strategies make investors very confused on the adoption of the strategy that really works. ...
Purpose - This article aims to present a new strategy of portfolio selection. Design/methodology/approach - After having made a comparative survey of different strategies of portfolio selection adopted by portfolio managers in Tunisia, we propose a new strategy, which we call weighted overreaction strategy. This strategy consists in over-weighting the stocks having bad performances in the past. Findings - The new proposed strategy turned out to be more performing than size, PER and overreaction strategies in the Tunisian stock market via a mean equality test. Those who adopt it should create a loser portfolio and should sell it at a later period (12 months) and generate average annual returns of 241.75%. Research limitations/implications - This result deserves generalization to other stock markets. As the Tunisian stock market is marked by its looseness and low capitalization, applying this strategy over similar or more developed market would open the way for research aiming to define other strategies and to select the best one for each market. Indeed, it should investigate investors’ behaviour which is certainly not the same in each stock market and outline the specific strategy for each market. Practical implications - The weighted overreaction strategy generated a considerable gain compared to other portfolios. Originality/value - The new proposed strategy turned out to be more performing than the other ones.
We document problems in measuring raw and abnormal five-year contrarian portfolio returns. ‘Loser’ stocks are low-priced and exhibit skewed return distributions. Their 163% mean return is due largely to their lowest-price quartile position. A $-th price increase reduces the mean by 25%, highlighting their sensitivity to micro-structure/liquidity effects. Long positions in low-priced loser stocks occur disproportionately after bear markets and thus induce expected-return effects. A contrarian portfolio formed at June-end earns negative abnormal returns, in contrast with the December-end portfolio. This conclusion is not limited to a particular version of the CAPM.
The overreaction hypothesis on a new set of data for the Brazilian stock market over the period 1970–1989 is investigated. Both market adjusted returns and the standard Sharpe-Lintner CAPM adjusted returns are used. Price reversals in 2-year returns are detected and the results contrast with the U.S. evidence in that the magnitude of the effect is more pronounced than in the U.S. The results also suggest that differences in risk, as measured by CAPM-betas using the method suggested by Chan (Chan K.C., 1988, On the contrarian investment strategy, Journal of Business 61, 147–163), cannot account for the overreaction effect. I also examine the issue of asymmetry versus symmetry in the overreaction effect. Using the criterion proposed by Dissanaike (Dissanaike G., 1992, Are stock price reversals really symmetric? University of Cambridge Department of Applied Economics Discussion Paper, AF series, No. 4) I find evidence that the price reversals are asymmetric.
"First draft: November 1988. Latest revision: May 1989." Includes bibliographical references. Research support from the Geewax-Terker Research Fund, the National Science Foundation, the John M. Olin Fellowship at the NBER and the Q Group. by Andrew W. Lo and A. Craig MacKinlay.
This article presents new evidence about the time-series behavior of stock prices. Daily return series exhibit significant levels of second-order dependence, and they cannot be modeled as linear white-noise processes. A reasonable return-generating process is empirically shown to be a first-order autoregressive process with conditionally heteroskedastic innovations. In particular, generalized autoregressive conditional heteroskedastic GARCH (1, 1) processes fit to data very satisfactorily. Various out-of-sample forecasts of monthly return variances are generated and compared statistically. Forecasts based on the GARCH model are found to be superior. Copyright 1989 by the University of Chicago.
Predictable variation in equity returns might reflect either (1) predictable changes in expected returns or (2) market inefficiency
and stock price “overreaction.” These explanations can be distinguished by examining returns over short time intervals since
systematic changes in fundamental valuation over intervals like a week should not occur in efficient markets. The evidence
suggests that the “winners” and “losers” one week experience sizeable return reversals the next week in a way that reflects
apparent arbitrage profits which persist after corrections for bid-ask spreads and plausible transactions costs. This probably
reflects inefficiency in the market for liquidity around large price changes.
If returns on some stocks systematically lead or lag those of others, a portfolio strategy that sells “winners” and buys “losers”
can produce positive expected returns, even if no stock’s returns are negatively autocorrelated as virtually all models of
overreaction imply. Using a particular contrarian strategy we show that, despite negative autocorrelation in individual stock
returns, weekly portfolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations.
We find that the returns of large stocks lead those of smaller stocks, and we present evidence against overreaction as the
only source of contrarian profits.
This paper documents that strategies that buy stocks that have performed well in the past and sell stocks that hav e performed poorly in the past generate significant positive returns o ver three- to twelve-month holding periods. The authors find that the profitability of these strategies are not due to their systematic risk or to delay ed stock price reactions to common factors. However, part of the abnorm al returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented. Copyright 1993 by American Finance Association.
This paper relates cross-sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high-quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. The authors' findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns. Copyright 1991 by American Finance Association.
We investigate the joint dynamics of returns and trading volume of 556 foreign stocks cross-listed on U.S. markets. Heterogeneous-agent trading models rationalize how trading volume reflects the quality of traders information signals and how it helps to disentangle whether returns are associated with portfolio-rebalancing trades or information-motivated trades. Based on these models, we hypothesize that returns in the home (U.S.) market on high-volume days are more likely to continue to spill over into the U.S. (home) market for those cross-listed stocks subject to the risk of greater informed trading. Our empirical evidence provides support for these predictions, which confirms the link between information, trading volume, and international stock return comovements that has eluded previous empirical investigations.
This book was originally published by Macmillan in 1936. It was voted the top Academic Book that Shaped Modern Britain by Academic Book Week (UK) in 2017, and in 2011 was placed on Time Magazine's top 100 non-fiction books written in English since 1923. Reissued with a fresh Introduction by the Nobel-prize winner Paul Krugman and a new Afterword by Keynes’ biographer Robert Skidelsky, this important work is made available to a new generation.
The General Theory of Employment, Interest and Money transformed economics and changed the face of modern macroeconomics. Keynes’ argument is based on the idea that the level of employment is not determined by the price of labour, but by the spending of money. It gave way to an entirely new approach where employment, inflation and the market economy are concerned.
Highly provocative at its time of publication, this book and Keynes’ theories continue to remain the subject of much support and praise, criticism and debate. Economists at any stage in their career will enjoy revisiting this treatise and observing the relevance of Keynes’ work in today’s contemporary climate.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.
Présente les concepts et les techniques modernes d'analyse des marchés financiers et leurs applications à la gestion de portefeuille et à la gestion des risques. Aborde l'organisation et le fonctionnement des marchés financiers, leur efficience, le modèle de marché et les modèles d'équilibre des actifs financiers, les modèles d'évaluation d'actions, la mesure de performance des portefeuilles...
We study whether the behavior of stock prices, in relation to size and book-to-market-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.
Finance, 1995, Volume 16, N°1 R RESUME ESUME Les stratégies de sur-réaction sont fondées sur la dépendance négative des rentabilités. La durée optimale de sur-réaction se situe entre 3 et 4 ans. Une première application pratique de ce phénomène consiste à mettre en place une stratégie consistant à acheter en achetant les titres ayant eu des performances négatives depuis 3 ou 4 ans et à vendre ceux ayant été les plus performants et inverser ces positions au bout de trois ans ou quatre ans. La rentabilité de la stratégie classique provient des quinze à vingt titres ayant eu de performances passées extrêmes, la capitalisation et le risque; ces facteurs explicatifs permettent de définir de nouvelles stratégies. La rentabilité de ces nouvelles stratégies de sur-réaction est supérieure à celle de la stratégie de sur-réaction classique. La stratégie composée, tenant compte à la fois de la performance passée et de la capitalisation sur une durée de détention de 36 mois est elle-même supérieure à la stratégie composée avec le risque: 14.44% pour la capitalisation, 13.11% pour le risque contre 7.11% pour la stratégie classique de sur-réaction par quintiles et 10% par division en 9 sous-groupes équiprobables. Cette stratégie est réalisable. En effet, la mise en place d'une telle stratégie nécessite des achats, mais également des ventes à découvert. Or celles-ci sont possibles sur le marché RM. Les coûts de transaction et le biais dû aux écarts de fourchette représentent environ 2% en moyenne pour la durée optimale de 36 mois.
The power of dividend yields to forecast stock returns, measured by regression R2, increases with the return horizon. We offer a two-part explanation. (1) High autocorrelation causes the variance of expected returns to grow faster than the return horizon. (2) The growth of the variance of unexpected returns with the return horizon is attenuated by a discount-rate effect - shocks to expected returns generate opposite shocks to current prices. We estimate that, on average, the future price increases implied by higher expected returns are just offset by the decline in the current price. Thus, time-varying expected returns generate ‘temporary’ components of prices.
Recent research finds that the prior period's worst stock return performers (losers) outperform the prior period's best return performers (winners) in the subsequent period. This potential violation of the efficient markets hypothesis is labeled the “overreaction” phenomenon. This paper shows that the tendency for losers to outperform winners is not due to investor overreaction, but to the tendency for losers to be smaller-sized firms than winners. When losers are compared to winners of equal size, there is little evidence of any return discrepancy, and in periods when winners are smaller than losers, winners outperform losers.
Testing the two-parameter asset pricing theory is difficult (and currently infeasible). Due to a mathematical equivalence between the individual return/‘beta’ linearity relation and the market portfolio's mean-variance efficiency, any valid test presupposes complete knowledge of the true market portfolio's composition. This implies, inter alia, that every individual asset must be included in a correct test. Errors of inference inducible by incomplete tests are discussed and some ambiguities in published tests are explained.
The empirical relationship between earnings' yield, firm size and returns on the common stock of NYSE firms is examined in this paper. The results confirm that the common stock of high E/P firms earn, on average, higher risk-adjusted returns than the common stock of low E/P firms and that this effect is clearly significant even if experimental control is exercised over differences in firm size. On the other hand, while the common stock of small NYSE firms appear to have earned substantially higher returns than the common stock of large NYSE firms, the size effect virtually disappears when returns are controlled for differences in risk and E/P ratios. The evidence presented here indicates that the E/P effect, however, is not entirely independent of firm size and that the effect of both variables on expected returns is considerably more complicated than previously documented in the literature.
This paper investigates transitory components in stock prices. After showing that statistical tests have little power to detect persistent deviations between market prices and fundamental values, we consider whether prices are mean-reverting, using data from the United States and 17 other countries. Our point estimates imply positive autocorrelation in returns over short horizons and negative autocorrelation over longer horizons, although random-walk price behavior cannot be rejected at conventional statistical levels. Substantial movements in required returns are needed to account for these correlation patterns. Persistent, but transitory, disparities between prices and fundamental values could also explain our findings.
Research on this project was supported by a grant from the National Science Foundation. I am indebted to Arthur Laffer, Robert Aliber, Ray Ball, Michael Jensen, James Lorie, Merton Miller, Charles Nelson, Richard Roll, William Taylor, and Ross Watts for their helpful comments.
La finance comportementale propose deux modèles opposés mais liés au comportement de l’investisseur : la sous-réaction et la sur-réaction. La rationalité limitée de l’investisseur expliquerait les rentabilités anormales des titres sur les marchés financiers. Nous développons une méthodologie qui nous permet de distinguer explicitement les sous et les sur-réactions à l’annonce des résultats. Notre étude montre qu’il y a une sous-réaction initiale puis une sur-réaction finale à long terme validant ainsi les résultats des modèles comportementaux récents. De plus, nous prouvons que cette sur-réaction à long terme est attribuée en partie à une sous-réaction initiale liée au phénomène "momentum" suivant les résultats antérieurs et récents annoncés. Two conflicting behavioural models under-reaction and over-reaction, have been proposed as explanations for the abnormal return patterns following a variety of corporate events. We develop a methodology that allows us to explicitly distinguish between these two models and apply it to the earnings announcement. We find an evidence to support a more complicated behavioural model where investors under-react to short-term information i.e. the earnings announcement and over-react to long-term trends. Our evidence shows that long-run abnormal returns can be attributed only to the investor under-reaction model. So the reconciliation of the two persistent models is evident. Investors under-react to short-term earnings signal available prior to the and subsequently to the earnings announcement.
Recent research has found an abnormal return on the strategy of buying lo sers and selling winners in the stock market, a finding sometimes int erpreted as support for the market overreaction hypothesis. This arti cle explores an alternative interpretation of this evidence. The auth or finds that the risks of losers and winners are not constant. The e stimation of the return of this strategy is, therefore, sensitive to the methods used. When risk changes are controlled for, only small ab normal returns are found. The model of risk and return used in the pa per is the standard capital asset pricing model. Copyright 1988 by the University of Chicago.
We show that there is an asymmetry in the predictability of the volatilities of large versus small firms. Using both univariate and multivariate ARMA-GARCH-M parameterizations, we find that volatility surprises to large market value firms are important to the future dynamics of their own returns as well as the returns of smaller firms. Conversely, however, shocks to smaller firms have no impact on the behavior of either the mean or the variance of the returns of larger capitalization companies. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
This article analyzes the behavior of stock return volatility using daily data from 1885 through 1988. The October 1987 stock
market crash was unusual in many ways. October 19 was the largest percentage change in market value in over 29,000 days. Stock
volatility jumped dramatically during and after the crash. Nevertheless, it returned to lower, more normal levels more quickly
than past experience predicted. I use data on implied volatilities from call option prices and estimates of volatility from
futures contracts on stock indexes to confirm this result.
We show that bid-ask errors in transaction prices are the predominant source of apparent price reversals in the short run for NASDAQ firms. Once we extract measurement errors in prices caused by the bid-ask spread, we find little evidence of market overreaction. On the contrary, we find that security returns are positively, and not negatively, autocorrelated. We also show that bid-ask errors lead to substantial spurious volatility in transaction returns; about half of measured daily return variances can be induced by the bid-ask effect.
Previous estimates of a 'size effect' based on daily returns data are biased. The use of quoted closing prices in computing returns on individual stocks imparts an upward bias. Returns computed for buy-and-hold portfolios largely avoid the bias induced by closing prices. Based on such buy-and-hold returns, the full-year size effect is half as large as previously reported, and all of the full-year effect is, on average, due to the month of January.
We examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted, especially in the case of price declines; however, the magnitude of the overreaction is small compared to the bid-ask spreads observed for the individual stocks in the sample. We interpret this finding as being consistent with a market that is efficient after transactions costs are considered.
This paper tests whether the stock market overreacts to extreme earnings, by examining firms' stock returns over the thirty-six months subsequent to extreme earnings years. While the poorest earners do outperform the best earners, the poorest earners are also significantly smaller than the best earners. When poor earners are matched with good earners of equal size, there is little evidence of differential performance. This suggests that size, and not investor overreaction to earnings, is responsible for the "overreaction" phenomenon, the tendency for prior period losers to outperform prior period winners in the subsequent period. Copyright 1989 by American Finance Association.
In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.
This study examines the empirical relationship between the return and the total market value of NYSE common stocks. It is found that smaller firms have had higher risk adjusted returns, on average, than larger firms. This ‘size effect’ has been in existence for at least forty years and is evidence that the capital asset pricing model is misspecified. The size effect is not linear in the market value; the main effect occurs for very small firms while there is little difference in return between average sized and large firms. It is not known whether size per se is responsible for the effect or whether size is just a proxy for one or more true unknown factors correlated with size.
The authors study whether the behavior of stock prices, in relation to size and book-to-market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns but the authors find no link between BE/ME factors in earnings and returns. Copyright 1995 by American Finance Association.
For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier. Copyright 1994 by American Finance Association.
The authors examine stock returns following large one-day price declines and find that the bid-ask bounce and the degree of market liquidity explain short-term price reversals. Further, they do not find evidence consistent with the overreaction hypothesis. The authors observe that securities with large one-day price declines perform poorly over an extended time horizon. Copyright 1994 by American Finance Association.
The authors show that the returns to the typical long-term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single-per iod (monthly) returns over long intervals. The cumulation process not on ly cumulates "true" returns but also the upward bias in single-period reutrns induced by measurement errors. The authors also show that the remaining "true" returns to loser or winner firms have no relation to overreaction. This study has important implicati ons for event studies that use cumulative returns to assess the impact o f information events. Copyright 1993 by American Finance Association.
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