Abnormal Returns After Large Stock Price Changes: Evidence from Asia-Pacific Markets

Abstract

This paper aims to expand the overreaction literature by examining whether the price reversals occur in the short-term period, i.e. three days, and longer term period, i.e. up to twenty days, following large one-day price changes in Asia-Pacific markets over the period 2001 to 2005. Our results based on firm data in three Asia-Pacific markets, namely, Australia, Japan and Vietnam, and static and dynamic measures of large price changes indicate the followings. First, stock prices tend to reverse over the short-term period after large price changes. Second, in the case of large price declines defined by arbitrary trigger values, investors may earn profit from exploiting the phenomena of price reversals; however, the profit is not large enough to exploit since it is less than the profit from passive funds. This result is supportive of the weak form of efficient market hypothesis. Third, we find mixed evidence of long run price reversal across markets. Forth, market conditions, i.e. bear or bull, may not explain the magnitude of price reversals. Finally, the dynamic measures of large price changes based on individual firms provide more consistent evidence across markets, which is supportive of short-term price reversals and overreaction hypothesis. This evidence exists in the emerging market of Vietnam as well as developed Australian and Japanese markets.

Keywords: Event Studies, Information and Market Efficiency, Overreaction, Price Reversals, Asia - Pacific stock markets, Vietnam, Australia, Japan

JEL Classification: G12, G14