Market overreaction and investment strategies

Chulwoo Han, Soosung Hwang () and Doojin Ryu

Applied Economics, 2015, vol. 47, issue 54, 5868-5885

Abstract: We investigated the overreaction of the Korean market in response to shocks in the US stock market, and analysed the dynamic relationship between these two markets since 1996. We found that the KOSPI 200 index futures overreacted to the S&P 500 index returns during the period from 2000 to 2009 when the Korean market was in its growth stage. As the Korean market matured and the KOSPI 200 overnight futures were introduced in 2009, the overreaction disappeared. When investors employed the Kelly model or Value-at-Risk to exploit the overreaction, their trading strategies produced significant profits during the growth stage even after considering transaction costs and risk, but the profits attenuated once the overnight futures market was launched in 2009.

Date: 2015
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DOI: 10.1080/00036846.2015.1058913

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