Asymmetric reverting behavior of short-horizon stock returns: An evidence of stock market overreaction |
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| Institution: | 1. University of Portsmouth, Portsmouth Business School, Portland Street, PO1 3DE, UK;2. Panteion University of Social and Political Sciences, Department of Economics and Regional Development, 136 Syggrou Av., GR17671, Athens, Greece;3. University Research Institute of Urban Environment and Human Resources, Panteion University, 29 Aristotelous St., GR 17671, Athens, Greece;4. University of Patras, Department of Economics, University Campus 265 04, Rio, Patras, Greece;1. Business School and Center for Finance and Investment Management, Hunan University, Changsha 410082, China;2. School of Economics and Management, Nanjing University of Science and Technology, Nanjing 210094, China;3. School of Management, Xi’an Polytechnic University, Xi’an 710048, China |
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| Abstract: | This paper investigates the uneven mean reverting pattern of monthly return indexes of the NYSE, AMEX and NASDAQ, using asymmetric non-linear smooth-transition (ANST) GARCH models. It also evaluates the extent to which time-varying volatility in the index returns support the stock market overreaction hypothesis. The models illuminate patterns of asymmetric mean reversion and risk decimation. Between 1926:01 and l997:12, not only did negative returns reverse to positive returns quicker than positive returns reverted to negative ones, but negative returns, in fact, reduced risk premiums from predictable high volatility. The findings support the market overreaction hypotheses. The asymmetry is due to the mispricing behavior on the part of investors who overreact to certain market news. The findings also corroborate arguments for the “contrarian” portfolio strategy. |
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