Testing Explanatory Power of Two Behavioral Models for Price Continuation

Abstract

The overconfidence and self-attribution model developed by Daniel, Hirshleifer and Subrahmanyam (1998) forecasts a stronger price continuation for low book-to-market stocks. Besides, Hong and Stein’s (1999) sluggish information spreading model predicts a higher price continuation for small firms. This study provides evidence that neither predictions can hold in the Taiwanese stock market, inconsistent with the strong confirmation of US evidence. The discrepancy of results in the two markets implies that existence of price continuation might be a global phenomenon, yet the underlying sources may be market specific.