Continuing overreaction and momentum in a market with price limits
Kuan-Cheng Ko and
Pacific-Basin Finance Journal, 2018, vol. 48, issue C, 56-71
In this paper, we document strong return predictability for continuing overreaction in Taiwan, a market without the existence of momentum for conventional momentum strategies. Using signed volume to proxy for the level of continuing overreaction, we show that the strategy that buys stocks with upward continuing overreaction and short sells those with downward continuing overreaction generates both intermediate-term continuations and long-term reversals in this market. The evidence is consistent with the prediction of the model based on investor overconfidence and biased self-attribution in predicting future stock returns. We further examine the impact of price limits on this overreaction-based return predictability by isolating the information embedded in signed volumes for limit-hit and non-hit days, respectively. The findings indicate that the imposition of price limits seems to restrain investors' overreaction behavior and that trading volume in non-hit days is a cleaner measure to capture the level of investor overconfidence in generating intermediate-term continuations and long-term reversals.
Keywords: Continuing overreaction; Momentum; Price limits; Taiwan stock market (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:48:y:2018:i:c:p:56-71
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