Identifying Overreaction in Markets

Kok Loang Ooi (), Norazlin Binti Ab Aziz () and Wee Yeap Lau ()
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Kok Loang Ooi: Universiti Malaysia
Norazlin Binti Ab Aziz: Universiti Malaysia
Wee Yeap Lau: Universiti Malaysia

Chapter Chapter 11 in Following the Crowd: Psychological Drivers of Herding and Market Overreaction, 2025, pp 147-157 from Springer

Abstract: Abstract This chapter examines the phenomenon of overreaction in financial markets, primarily focusing on excessive price movements that deviate from their respective fundamental values, as well as the identification and measurement of these deviations. It presents preliminary alerts that reveal distorted prices, thereby enabling investors to forecast and react to market inefficiencies. Furthermore, the chapter examines data-driven methodologies for tracking overreaction patterns, utilising statistical and computational methods to distinguish between rational price adjustments and those driven by sentiment. Practical equipment for mitigating emotional and cognitive biases in the investment decision-making process is also mentioned, thereby allowing for a more comprehensive understanding of behavioural finance techniques, which can guide investors towards more disciplined and rational investing. The chapter presents a comprehensive framework for understanding and mitigating market overreactions through a detailed analysis, thereby contributing to informed and more effective investment practices.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-95-0792-4_11

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DOI: 10.1007/978-981-95-0792-4_11

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