Abstract:
Unlike the 1987 stock market crash, the 1997 stock market decline was clearly
preceded by new information that affected fundamental values of U.S. firms.We
provide a detailed description of U.S. stock returns surrounding the Asian financial
crisis. Consistent with the overreaction hypothesis, we find strong evidence of a
magnitude effect in short-term return reversals. Additionally, we find evidence of
short-term return predictability in the aftermath. Our results are robust to controls
for size, price, risk, and bid-ask bounce effects. Overall, the results are indicative
of investor overreaction in times of market crisis.
