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 reversals. Third, in the case of large price declines, investors may earn marginal abnormal returns from exploiting the phenomena of price reversals; a result may challenge the weak-form of EMH. Forth, large price changes are followed by positive performance over longer term, i.e. over days 6 through 20 after the day of initial large price changes.
To conclude, the contributions of our study are using GMM methodology to investigate the issue of overreaction, price reversals, and market efficiency on a largely unexplored market, i.e. Vietnamese stock market. Our study confirms findings of Atkins and Dyl (1990), Bremer and Sweeney (1991), Cox and Peterson (1994), and Bremer et al. (1997) that stock prices are short-term reversed after large one-day price decreases. While the existence of statistically significant abnormal returns following large price decreases is economically significant, it may challenge the validity of weak form of EMH which needs further clarification in future research.
Atkins, A. and E. Dyl (1990) “Price reversals, bid-ask spreads, and market efficiency,” Journal of Financial and Quantitative Analysis, 25, 535–47 14 ABNORMAL RETURNS AFTER LARGE STOCK PRICE CHANGES: EVIDENCE FROM THE VIETNAMESE STOCK MARKETT
PHAM Vu Thang Long†
JEL classification: G12, G14
Keywords: Event Studies; Information and Market Efficiency; Overreaction Hypothesis; Price Reversals; Vietnamese Stock Market;
Graduate School of Economics, Osaka University, 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan. Email: firstname.lastname@example.org
I would like to thank Kazuhiko Nishina, and Nabil Maghrebi for many helpful comments and suggestions. I am grateful to Bruce Grundy (the AsianFA/FMA discussant) and participants at the AsianFA/FMA Meeting in Auckland, New Zealand, 2006 for valuable comments....
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,
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