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Overreaction and momentum in the Vietnamese stock market

Overreaction and momentum in the Vietnamese stock market Although the solid empirical proof of momentum is documented in various stock markets, there are many debates among academics with respect to the source of momentum profit. The first aim of this paper is intensively re-examine the momentum profit in Vietnam, an important emerging market. Secondly, the authors study the return predictability of a measure of investors’ overreaction, then examine whether the momentum effect in Vietnam is explained by overreaction.Design/methodology/approachUsing the weekly data of more than 300 non-financial Vietnamese stocks during 2009–2019, the authors build a measure of investors’ overreaction, which is based on trading volume and the sign of stock returns. Consequently, to investigate whether momentum exits after controlling for overreaction, the authors carefully compare trading strategies based on overreaction with price momentum strategies using adjusted returns and double sorts on past returns and levels of overreaction.FindingsThe article makes three main findings. Firstly, the authors discover the empirical evidence of momentum in the Vietnamese equity market. Secondly, the measure of overreaction could be a predictor of Vietnamese stock returns. Stocks that have experienced a stronger upward overreaction provide a higher average return. Finally, returns on trading strategies based on overreaction are robust after adjusting for momentum, while returns on momentum portfolios become insignificant after adjusting for overreaction. By double-sorting, the authors document that holding past returns constant, the average returns of portfolios rise monotonically with their measure of overreaction. Hence, the momentum profit in Vietnam arises from investors’ overreaction.Originality/valueThe paper extends previous research on the behavioral explanation of momentum in emerging stock markets, which has not been fully exploited in the literature. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Overreaction and momentum in the Vietnamese stock market

Quy Duong, Le; Bertrand, Philippe
Managerial Finance , Volume 49 (1): 16 – Jan 2, 2023
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References (49)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0307-4358
DOI
10.1108/mf-01-2022-0013
Publisher site
See Article on Publisher Site

Abstract

Although the solid empirical proof of momentum is documented in various stock markets, there are many debates among academics with respect to the source of momentum profit. The first aim of this paper is intensively re-examine the momentum profit in Vietnam, an important emerging market. Secondly, the authors study the return predictability of a measure of investors’ overreaction, then examine whether the momentum effect in Vietnam is explained by overreaction.Design/methodology/approachUsing the weekly data of more than 300 non-financial Vietnamese stocks during 2009–2019, the authors build a measure of investors’ overreaction, which is based on trading volume and the sign of stock returns. Consequently, to investigate whether momentum exits after controlling for overreaction, the authors carefully compare trading strategies based on overreaction with price momentum strategies using adjusted returns and double sorts on past returns and levels of overreaction.FindingsThe article makes three main findings. Firstly, the authors discover the empirical evidence of momentum in the Vietnamese equity market. Secondly, the measure of overreaction could be a predictor of Vietnamese stock returns. Stocks that have experienced a stronger upward overreaction provide a higher average return. Finally, returns on trading strategies based on overreaction are robust after adjusting for momentum, while returns on momentum portfolios become insignificant after adjusting for overreaction. By double-sorting, the authors document that holding past returns constant, the average returns of portfolios rise monotonically with their measure of overreaction. Hence, the momentum profit in Vietnam arises from investors’ overreaction.Originality/valueThe paper extends previous research on the behavioral explanation of momentum in emerging stock markets, which has not been fully exploited in the literature.

Journal

Managerial Finance – Emerald Publishing

Published: Jan 2, 2023

Keywords: Momentum; Overreaction; Overconfident investors; Stock returns; Trading strategy

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