Announcement-specific stock market and currency market overreaction and under-reaction

This study documents the nature of the underlying information that caused investor overreaction and under-reaction. While research has documented the existence of market overreaction and under-reaction, it has not comprehensively addressed the underlying information releases that caused the extreme price fluctuations. This study controls for the underlying announcements, and finds that the degrees of overreaction and under-reaction vary according to the underlying information releases. A primary contribution of this dissertation is the finding that undefined events are associated with higher degrees of overreaction than defined events. The Wall Street Journal Index was used to determine if each event had an announcement that coincided with it. Defined events are those for which an underlying announcement was found in the Wall Street Journal Index. For undefined events, no announcement was found. This finding supports the theory of investor overconfidence and biased self-attribution by Daniel, Hirshleifer, and Subrahmanyam (1998). This study analyzes the overreaction and under-reaction phenomenon in three areas: international securities, domestic securities, and foreign currency. The international securities analyzed are American depository receipts and international closed-end funds. The domestic securities analyzed are financial and non-financial stocks. In the foreign currency area, currencies are classified into two types: emerging country currencies and industrial country currencies. In all of these areas, controlling for the underlying announcements is beneficial in understanding market overreaction and under-reaction. Finally, cross-sectional regression equations are employed to relate post-event returns or exchange rate changes to different variables, such as initial price change, pre-event information leakage, size (market value), month of the year (December or January), day of the week, and announcement type. There is a substantial amount of evidence that suggests larger initial price movements and prevent information leakage are associated with higher degrees of overreaction, and that the tendency towards overreaction is stronger for undefined events.