Behavioral Finance as Science: Implications From the Research of Paul Slovic

In this paper, we examine the short-run overreaction phenomenon in the Hong Kong market using data from March 1996 to June 1998. The study period encompasses the pre- and post-Asian financial crisis period. Consistent with prior studies on other markets, we find evidence of overreaction in the Hong Kong market prior to the Asian financial crisis. The overreaction phenomenon is more pronounced for winners than losers. While we document evidence of overreaction in the pre-crisis period, we find that abnormal profits obtained from exploiting such a phenomenon are economically insignificant after accounting for transaction costs. Thus, the Hong Kong stock market is efficient in the weak form. We also explore the possibility that the results are affected by factors such as the bid-ask bounce, the size effect, and the day-of-the-week effect. The results, however, are robust to these factors.