Under- or -overreaction: Investors’ response to black swan events

Abstract

The objective of this study is to explore whether four categories of investors overreact or underreact to specific black swan events in the Vietnam Stock Exchange (HSX) and whether their trading patterns can predict stock returns. We find evidence of the short-term overreaction/underreaction on the HSX. In particular, the study's findings indicate that domestic institutions and securities dealers tend to exhibit overreaction shortly after domestic black swan events, such as tensions in the East Sea and the arrest of a big manipulator, but exhibit underreaction shortly after international events, such as the Covid-19 pandemic and the Ukraine-Russia War. Conversely, foreign institutions tend to exhibit overreaction shortly after international events but exhibit underreaction shortly after domestic events. The outcome of this behaviour is that domestic institutions and securities dealers purchased the most and earned the highest return in the post-120-day period following the domestic black swan events, whereas foreign institutions gained the highest return in the post-120-day period following the global black swan events. Moreover, individual investors underreacted in all events and experienced negative returns over the window(+1, + 120). The findings also suggest that small firms tend to have greater price reversals than large firms. Finally, the study provides evidence of information leakage on the HSX.