Abstract
This paper examines the overreaction hypothesis on market indices for three- and five-year investment periods using end-of-month data from 49 Morgan Stanley Capital International indices from December 1970 to December 2018. The returns were computed as holding-period returns, instead of cumulative average returns, to avoid an upward bias. We found economically and statistically significant return reversals for both the three-year and five-year investment periods. When implemented in developed markets only, there is evidence that supports the overreaction hypothesis, although the excess returns are smaller than those observed in the whole sample. Not only did the losers outperform the winners, but the former were also less risky. Notwithstanding these results, the overreaction strategy is sensitive to the periods considered, thus highlighting the possibility that its success is not time stationary.
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