Pricing Continuous Overreaction: Evidences from Tehran Security Exchange

Abstract

Investors' overreaction is one of the most important behavioral biases which might affect stocks returns so they can be priced. Furthermore, investors' overreaction increases trading volume, therefore it can be captured by using a measure based on trading volume and return sign. In this paper, we use a measure of signed volume (Continuous Overreaction) for calculating investors' overreaction and its relation with stock return in Tehran Stock Exchange using Fama-Mcbeth's (1973) regression. Also, we survey the return statistical significance of a trading strategy based on continuous overreaction measures. For doing so, we study companies listed on TSE between 2009 to 2018. This period contains 102 months and, on average, 241 companies were studied. Our results show that investors' overreaction affects stock return in Tehran Stock Exchange. Also, the return of the trading strategy based on investors' overreaction is statistically significant for 12 months portfolio formation period and 6, 9, and 12 months holding periods

Keywords

• investors overreaction
• continuous overreaction measure
• trading strategy based on investors overreaction