TY - JOUR
T1 - Overreaction of index futures in Hong Kong
AU - Kwok-Wah Fung, Alexander
AU - Lam, Kin
N1 - Funding Information:
The comments and suggestions of the editor and the anonymous referees, which greatly improved the paper, are much appreciated. The authors would like to thank the Hong Kong Baptist University and the University Grants Council for their research grants support.
PY - 2004/6
Y1 - 2004/6
N2 - In this paper we show that the pricing error of index futures relative to its fair value can be used to identify investors' overreaction in index futures market. Specifically, when investors are overly pessimistic (optimistic), the prices of index futures are well below (above) their fair values. When the excess pessimism (optimism) is gone, the prices of index futures revert to catch up with their fair values. After taking into consideration transaction cost, execution time lag, and risk adjustment, profitable strategies can be developed to exploit this overreaction. We find that overreaction exists during intraday trading and market closing.
AB - In this paper we show that the pricing error of index futures relative to its fair value can be used to identify investors' overreaction in index futures market. Specifically, when investors are overly pessimistic (optimistic), the prices of index futures are well below (above) their fair values. When the excess pessimism (optimism) is gone, the prices of index futures revert to catch up with their fair values. After taking into consideration transaction cost, execution time lag, and risk adjustment, profitable strategies can be developed to exploit this overreaction. We find that overreaction exists during intraday trading and market closing.
KW - Overreaction
KW - Index futures
KW - Investor sentiment
KW - Pricing error
UR - http://www.scopus.com/inward/record.url?scp=1942508856&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2003.06.001
DO - 10.1016/j.jempfin.2003.06.001
M3 - Journal article
AN - SCOPUS:1942508856
SN - 0927-5398
VL - 11
SP - 331
EP - 351
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
IS - 3
ER -