Stock Price Indexes

The primary objectives of this study are to investigate the stock market over- or underreaction of various U.S. stock market indexes, the over- or underreaction of a global stock market index, and the over- or underreaction of various-countries' national stock markets relative to a "global" over- or underreaction. The secondary objectives are to investigate the reasons for the U.S. over- or underreaction and for the relative under- or overreaction of individual countries. For six U.S. stock market indexes, we find a one-day stock market underreaction to highly positive and negative news releases. Over a sixty-day interval, we find strong evidence of a stock market underreaction (overreaction) to positive (negative) news. Cross-sectionally, we find strong evidence that investors are more optimistic the larger the recent runup in the stock market index is. Also, investors are more optimistic in periods of high economic growth, whether they are faced with positive or negative information. Focusing on the MSCI World Indexes denominated in both local currencies and U.S. dollars, we find that investors underreact to both positive and negative news in both the short- and the long-run. The last objective of this study was to investigate the relative under- or overreaction of nineteen individual countries in response to a global under- or overreaction. We find that several countries exhibit a one-day underreaction relative to the MSCI World Index on the day following a very large positive or negative movement in the MSCI World Index. Over a sixty-day interval, several countries overreact relative to the MSCI World Index when positive information is released on a global basis but underreact to the MSCI World Index when negative information is released on a global basis. Cross-sectionally, results reveal evidence consistent with a hypothesis where investors are more optimistic with respect to both positive and negative news when there is a speculative bubble in the foreign stock market. We also find that investors in countries with high economic growth rates tend to be more optimistic than investors in countries with low economic growth rates when faced with positive and negative global news arrivals.