A Study of Short‐Run Overreaction in Hong Kong Stock Market

Abstract

Investors in Hong Kong tend to overreact to good news but not to bad news in the short run. ‘Winner’ stock portfolios making abnormal gains on the event day tend to make abnormal losses in the subsequent test period. On the contrary, abnormal losses persist in the test period for the loser stock portfolios. This may be attributable to the speculative nature of the Hong Kong market and thin trading of small‐sized stocks. Some evidence of small firm effect is found in this study, but price overreactions are more apparent with large size portfolios. Apart from size, asymmetrical investors' response to good news and bad news also drives stock prices to behave differently after experiencing abnormal gains or losses. For winner stocks, larger abnormal gains on day 0 are followed by larger abnormal losses in the subsequent 10‐day period. Whereas for loser stocks, larger abnormal losses are followed by larger but further losses in the test period. Last but not least, symptoms of weekly price seasonally are found amongst the abnormal return patterns in this study.

Citation

Chan, D. (1996), "A Study of Short‐Run Overreaction in Hong Kong Stock Market", Asian Review of Accounting, Vol. 4 No. 2, pp. 1-14. https://doi.org/10.1108/eb060671