Who overreacts to overnight news?: Empirical evidence from the Korean stock market

Abstract

We investigate whether the pattern of intraday return reversal in Korea, recently found to be significant only when the previous day’s United States stock market movements are relatively large, is due to overreaction of investors. We estimate a partial adjustment model modified to distinguish price reaction at the open and at the close, and the results indicate that the Korean stock market tends to overreact at the open and underreact at the close. Furthermore, our evidence suggests that foreign investors’ trading behavior contributes to overreaction at the open, while individual investors’ trading behavior contributes to return reversal during the trading day.