Contrarian strategies and investor overreaction under price limits

This study investigates the effects of price limits on investment performance of contrarian trading strategies in Taiwan’s stock market over the period 1997 to 2006. All contrarian strategies in intraday limit-hit stocks lead to superior returns relative to the benchmark index return, and the findings support the overreaction effect. Also, there is evidence of delayed overreaction reflected by price continuations for the overnight period and price reversals for the subsequent trading day. Moreover, investment performance of contrarian strategies is related to firm characteristics where investors tend to overreact more in small-size, high-turnover, and non-high-tech stocks. Finally, price overreaction is strong for up-hit stocks in the aftermath of catastrophic events. If overreaction exists, price-limit regulation designed to cool off investors and reduce price volatility may not be effective.