ABNORMAL RETURNS AFTER LARGE STOCK PRICE CHANGES: EVIDENCE FROM
A substantial number of empirical studies have investigated the overreaction hypothesis to ascertain whether overreaction has led to subsequent price reversals in the short-term period. While those studies focus on the world’s largest markets i.e. U.S. and
Japan, other emerging and developing markets are largely unexplored. This motivates us to further investigate the issue in Vietnamese stock market. Applying Generalized
Method of Moments approach on a sample size of 33 firms listed on the Ho Chi Minh
City Securities Trading Center over the five-year period from 2001 to 2005, this study finds that Vietnamese stock market appears to have overreacted to both bad and good news arrival on the day of large or extreme price changes. These extreme price changes are followed by short-term price reversals. The short-term price reversals are attributable to three main factors: overreaction, bid-ask spreads, and low market liquidity. Stocks that exhibited large price changes tend to have positive performance over longer term, i.e. days 6 through 20 after the day of initial large price changes. While the existence of statistically significant abnormal returns following large price decreases is economically significant from the standpoint of practical finance, it may challenge validity of the weak form of efficient market hypothesis. This challenge needs to be considered further in future research. Our results based on a sample of 33 firms listed on the Ho Chi Minh City
Securities Trading Center (HCMC STC) over the five-year period from January 2001 to
December 2005 indicate the followings. First, the Vietnamese stock market appears to have overreacted to both bad and good news, especially in the case of price decreases.
Second, stock prices tend to be reversed after large price changes. Three factors including overreaction, bid-ask spreads, and low market liquidity play important roles in explaining the short-term price
Japan, other emerging and developing markets are largely unexplored. This motivates us to further investigate the issue in Vietnamese stock market. Applying Generalized
Method of Moments approach on a sample size of 33 firms listed on the Ho Chi Minh
City Securities Trading Center over the five-year period from 2001 to 2005, this study finds that Vietnamese stock market appears to have overreacted to both bad and good news arrival on the day of large or extreme price changes. These extreme price changes are followed by short-term price reversals. The short-term price reversals are attributable to three main factors: overreaction, bid-ask spreads, and low market liquidity. Stocks that exhibited large price changes tend to have positive performance over longer term, i.e. days 6 through 20 after the day of initial large price changes. While the existence of statistically significant abnormal returns following large price decreases is economically significant from the standpoint of practical finance, it may challenge validity of the weak form of efficient market hypothesis. This challenge needs to be considered further in future research. Our results based on a sample of 33 firms listed on the Ho Chi Minh City
Securities Trading Center (HCMC STC) over the five-year period from January 2001 to
December 2005 indicate the followings. First, the Vietnamese stock market appears to have overreacted to both bad and good news, especially in the case of price decreases.
Second, stock prices tend to be reversed after large price changes. Three factors including overreaction, bid-ask spreads, and low market liquidity play important roles in explaining the short-term price
References: Atkins, A. and E. Dyl (1990) “Price reversals, bid-ask spreads, and market efficiency,” Journal of Financial and Quantitative Analysis, 25, 535–47 AsianFA/FMA Meeting in Auckland, New Zealand, 2006 for valuable comments. Abnormal Returns after Large Stock Price Changes: Evidence Fama (1969) proposed three forms of efficient market hypothesis (EMH): strong form,