Measuring Investor Overreaction

Abstract

This article compares the use of turning points in market portfolio prices with closing prices to infer times when investor sentiment has reached extreme levels. To proxy for the market portfolio, the author downloaded daily high–low closing prices for the S&P 500 Index from Yahoo Finance over the period from 1962–2012. Two artificially constructed stochastic time series serve as benchmarks that represent random behavior. The author presents evidence indicating that using turning points rather than closing prices more effectively measures times when investor sentiment reaches extreme levels.

TOPICS: Statistical methods, equity portfolio management