Are Extreme Returns Followed by Predictable Patterns in the Japanese Stock Market

Abstract

This paper examines the postevent price patterns of Japanese stocks that exhibited extreme price changes. Applying daily FamaFrench threefactor model, via GMM approach, to measure abnormal returns of 300 firms comprising the Nikkei 300 over the 2001�2005 period, this study confirms findings of previous literature on evidence of shortterm price reversals following large price changes. There is stronger evidence supporting the existence of shortterm price reversal following large price increases than that following large price decreases. The profits from contrarian investments by exploiting the phenomena of price reversals are not likely after taking into account of transaction costs. This is consistent with the weak form of Fama's (1969) efficient market hypothesis.