Overreaction of index futures in Hong Kong

Alexander Kwok-Wah Fung*, Kin Lam

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    17 Citations (Scopus)

    Abstract

    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.

    Original languageEnglish
    Pages (from-to)331-351
    Number of pages21
    JournalJournal of Empirical Finance
    Volume11
    Issue number3
    DOIs
    Publication statusPublished - Jun 2004

    Scopus Subject Areas

    • Finance
    • Economics and Econometrics

    User-Defined Keywords

    • Overreaction
    • Index futures
    • Investor sentiment
    • Pricing error

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