Overreaction after Controlling for Size and Book-to-Market Effects and its Mimicking Portfolio in Japan

Chaoshin Chiao (), David Cheng and Welfeng Hung

Review of Quantitative Finance and Accounting, 2005, vol. 24, issue 1, 65-91

Abstract: In this paper we observe that firm size (SZ) and book-to-market (BM) cannot fully explain stock returns on prior-return- (PR-) based portfolios in the Japanese stock market. The overreaction effect after controlling for the SZ and BM effects is significant and persistent, and accounts for a large part of the zero-investment returns on the loser to the winner. We therefore propose a new mimicking portfolio whose returns mimic the common factor in returns related to overreaction. Our evidence shows that the proposed four-factor model captures common variation in returns on portfolios, based on stocks’ SZ, BM, and PR, better than the well-known three-factor model does. Copyright Springer Science + Business Media, Inc. 2005

Keywords: size; book-to-market; prior return; overreaction (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s11156-005-5327-4

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