Investor Reaction in Stock Market Crashes and Post-Crash Market Reversals
International Journal of Business and Finance Research, Forthcoming
16 Pages Posted: 3 May 2015
There are 2 versions of this paper
Investor Reaction in Stock Market Crashes and Post-Crash Market Reversals
Date Written: December 15, 2014
Abstract
We study investor overreaction using data for five major stock market crashes during the 1987-2008 period. We find some evidence of investor overreaction in all five stock market crashes. The prices of stocks investors bid down more than the average during crashes tend to increase more than the average in post-crash market reversals. In line with CAPM, we find that high beta stocks lose more value in crashes and gain more value in post-crash market reversals relative to low beta stocks. We further find that smaller firms and those with a low market-to-book ratio lose more value in stock market crashes. However, they do not gain more value in post-crash market reversals, implying that investor reaction against these firms in stock market crashes is not an overreaction. In examining industry-specific behavior, our results indicate that investors overbid down the prices of high-tech stocks in the 1997 crash and manufacturing stocks in the 2008 crash relative to other stocks. However, the prices of stocks in these industries increased more than other stocks in the post-crash market reversals, implying investor overreaction for these industries in these stock market crashes.
Keywords: stock market crash, post-crash market reversal, determinants of stock returns, investor overreaction
JEL Classification: G00, G01, G10, G14
Suggested Citation: Suggested Citation