ABNORMAL RETURNS AFTER LARGE STOCK PRICE CHANGES: EVIDENCE FROM THE VIETNAMESE STOCK MARKET

Transcription

1 ABNORMAL RETURNS AFTER LARGE STOCK PRICE CHANGES: EVIDENCE FROM THE VIETNAMESE STOCK MARKET Pham Vu ThangLong Graduate School of Economics Osaka University 2007/3/21 VDF WORKSHOP, TOKYO 1

2 Determinants of stock prices at equilibrium Traditional Finance A simple case: two investors in an exchange economy SAME Location, job Risk Information set Future outcome No arbitrage opportunities EMH Securities mean, variance approach: CAPM (Nobel Laureate William F.Sharpe s Draft of Forthcoming Book: /3/21 VDF WORKSHOP, TOKYO 2

3 Efficient Market Hypothesis (EMH) Stock prices at any time fully reflect all available information in the strong form, all public available information in the semistrong form, and historical information in the weak form of EMH. Eugene Fama, Uni. of Chicago (1969) Future stock prices (following a random walk) are unpredictable & expected stock returns can only be determined by rational asset pricing models The University of Chicago s Fama still teaches that market behave rationally. But his colleagues have grown skeptical - FORTUNE 2007/3/21 VDF WORKSHOP, TOKYO 3

4 Determinants of stock prices at equilibrium Behavioral Finance A simple case: two investors in an exchange economy Location, job Risk Information set Future outcome Different Overreaction Securities Under-reaction (Nobel Laureate William F.Sharpe s Draft of Forthcoming Book: /3/21 VDF WORKSHOP, TOKYO 4

5 Overreaction Hypothesis Most people overreact to unexpected and dramatic news - Experimental psychology Extreme movements in stock prices will be followed by subsequent price movements in the opposite direction & The more extreme the initial price movement, the greater will be the subsequent adjustment. Werner De Bondt, Depaul Uni. and Richard Thaler, Uni. of Chicago (1985, Journal of Finance) After decades in the academic wilderness, behavioralist Thaler is now big man on Chicago campus - FORTUNE 2007/3/21 VDF WORKSHOP, TOKYO 5

6 Motivation Existing overreaction in Vietnamese stock market? Existing reversal patterns as suggested by overreaction hypothesis? (Debondt and Thaler, 1985)? Existing profit from contrarian investment? The market is efficient? 2007/3/21 VDF WORKSHOP, TOKYO 6

7 Mass Media 2007/3/21 VDF WORKSHOP, TOKYO 7

8 Mass Media (2) 2007/3/21 VDF WORKSHOP, TOKYO 8

9 VN-INDEX (28/7/00-27/2/07) volume jan jan jan2007 date... volume close high/low 2007/3/21 VDF WORKSHOP, TOKYO 9

10 Number of Stocks Listed on HCMC STC /3/21 VDF WORKSHOP, TOKYO 10

11 Correlations of monthly returns on stock market indices over the period VN-INDEX ALL-ORDS TOPIX VN-INDEX 1.00 ALL-ORDS TOPIX /3/21 VDF WORKSHOP, TOKYO 11

12 HCMC STC (HOSTC) Trading Mechanism Method of matching orders Method of reaching agreement Thin trading (currently 3 times of matching orders) Daily price limitation: 5% (Source: /3/21 VDF WORKSHOP, TOKYO 12

13 Data Vietnamese stock markets (HCMC STC) Extreme daily returns (greater (less) than or equal to + (-) 5%) 5 years of daily returns: Jan 2001 Dec 2005 (BIDV) All 33 listed firms VN-Index VN Risk free (IMF) INDEX = 100 What determines level of daily extreme returns & Why + - 5%? Daily price limitations Observations: 153 (48) winners & 177 (66) losers n P Q P it Q it i= 1 i0 i0 2007/3/21 VDF WORKSHOP, TOKYO 13

14 Methodology Abnormal returns: Expected returns: AR ~ = R i, τ i, τ, ~ E( Ri τ ) ~ [ E R R ] GMM estimations of expected returns Cross-sectional mean abnormal returns: E AR τ = Cross-sectional average cumulative abnormal returns: 1 N ~ ( R ) R = b ( ) i,τ f i M, τ N i= 1 AR i, τ τ2 N 1 CAR( τ1, τ2 ) = AR t = CAR i( τ1, τ2 N τ=τ 1 i= 1 f ) Test statistics: AR τ 1 2 θ1 = θ2 = 1 / 2 1 / 2 τ var( CAR( τ1, τ2 )) var( AR ) CAR( τ, τ ) 2007/3/21 VDF WORKSHOP, TOKYO 14

15 Why Generalized method of moments (GMM)? Mean Max Min Std.Dev Skewness Kurtosis Jarque-Bera Probability Fraction Return on VN-INDEX 2007/3/21 VDF WORKSHOP, TOKYO 15

16 Abnormal returns for three days of after large stock price increases Day Abnormal Return Test statistic 17.34*** * -2.56** ** 2007/3/21 VDF WORKSHOP, TOKYO 16

17 Cumulative abnormal returns around 20 days of 5% or greater price increases /3/21 VDF WORKSHOP, TOKYO 17

18 Mean abnormal returns for three days after large stock price decreases Day Abnormal Return Test statistic *** ** 2.67*** *** 2007/3/21 VDF WORKSHOP, TOKYO 18

19 Cumulative abnormal returns around 20 days of 5% or greater price decreases /3/21 VDF WORKSHOP, TOKYO 19

20 Potential explanations for price rebounds Market Overreaction Liquidity Bid-ask spread Bid Ask 2007/3/21 VDF WORKSHOP, TOKYO 20

21 Cumulative abnormal returns around 20 days of 5% or greater price increases 7 6 Ask (day 0) Bid (day 3) /3/21 VDF WORKSHOP, TOKYO 21

22 Cumulative abnormal returns around 20 days of 5% or greater price decreases Ask (day 2) -3-4 Bid (day 0) /3/21 VDF WORKSHOP, TOKYO 22

23 Example - REE REE_VOLUME dec dec dec jan jan2007 date... R EE_VOLU ME H IGH/LOW R EE_CLOSE REE regression line 95% c.i VN-INDEX Pham Vu Thang Long 2007/3/21 VDF WORKSHOP, TOKYO 23

24 Is there any room for arbitrageurs? Geometric return for every 1 DONG of initial investment Arbitrage strategy on price decreases: ROI i.e.: buy on day 0 and sell same stock on day 5 may earn extra 1.41 DONG for every 1 DONG over 5 year periods Risk of lose everything [ ( ) ] r = 1 66 i = 1 i What if considering transaction costs? What if considering passive investment? 2007/3/21 VDF WORKSHOP, TOKYO 24

25 Transaction costs Bid-ask spread, round-trip commission Average Bid-ask spread: 1.26% Average round-trip commission: 0.2%* Adjusted ROI=0.054 ( marginal contrarian profit) *Information for commission fee is based on the information published on the website of Vietnam News Daily, /3/21 VDF WORKSHOP, TOKYO 25

26 Passive Investment Strategy Buy and Hold Index i.e.: buy index portolio on 3, Jan 01 and sell on 30, Dec 05 day may earn extra 0.46 DONG for every 1 DONG over this 5 year periods. Active management strategy by following contrarian investment may not outperform the traditional advice: Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control COSTS and keep them as low as possible. VN-INDEX jul jul jul jul jul2005 Date 2007/3/21 VDF WORKSHOP, TOKYO 26

27 Concluding Remarks Existing overreaction in Vietnamese stock market? Existing reversal patterns as suggested by overreaction hypothesis? (Debondt and Thaler (1985, 1987))? Evidence suggests market may be inefficient to certain extents (slow speed of price adjustment, potentials for arbitrage opportunities) Better firm s performance subsequent to five-days following extreme returns. YES YES 2007/3/21 VDF WORKSHOP, TOKYO 27

28 THANK YOU!!! 2007/3/21 VDF WORKSHOP, TOKYO 28