Market overreaction, firm-specific information and macroeconomic variables in US and Chinese markets during COVID-19

Abstract

Purpose

This study examines the impact of firm-specific information and macroeconomic variables on market overreaction of US and Chinese winner and loser portfolio before and during COVID-19.

Design/methodology/approach

The firm-specific information includes firm size, volume, volatility, return of asset (ROA), return of equity (ROE), earning per share (EPS) and quick ratio while the macroeconomic variables are export rate, import rate, real GDP, nominal GDP, FDI, IPI and unemployment rate. Besides, one-third of the top performance stocks are categorized as winner portfolio while one-third of lowest performance stocks are categorized as loser portfolio. This study uses AECR to indicate stock return and measure market overreaction. GAECR is used to determine contrarian profit. The data range of pre-COVID-19 is from 1-Jan-2015 to 31-Dec-2019 while the period of COVID-19 is from 1-Jan-2020 to 31-Dec-2020.

Findings

In pre-COVID-19, firm-specific information (volatility, ROA, ROE and EPS) and macroeconomic variables are found to be correlated to stock return in US and Chinese portfolios except Chinese winner portfolio. Nonetheless, the impact of firm-specific information has vanished and macroeconomic variables are significant to stock return in COVID-19. It shows that investors rely on the economic indicators to trade in turbulent period due to emergence of COVID-19 as a disruption in market. Furthermore, US and Chinese portfolios are overreacted during COVID-19. Chinese loser portfolio has higher tendency of overreaction than US loser portfolio while US winner portfolio has higher tendency of overreaction than Chinese winner portfolio.

Originality/value

The results of this study assists academician, practitioners and investors on understanding and create awareness to the existence of market overreaction and the determinants that can cause the phenomenon.

Citation

Loang, O.K. and Ahmad, Z. (2022), "Market overreaction, firm-specific information and macroeconomic variables in US and Chinese markets during COVID-19", Journal of Economic Studies, Vol. 49 No. 8, pp. 1548-1565. https://doi.org/10.1108/JES-10-2021-0543