Continuing Overreaction and Stock Return Predictability

Prior studies argue that overconfidence-driven overreaction leads to return predictability and high trading volume. Motivated by these studies, we propose a measure of continuing overreaction using weighted signed volumes. We find that the strategies of buying stocks with upward continuing overreaction and selling stocks with downward continuing overreaction generate significant positive returns, and our measure of continuing overreaction is a better predictor of future returns than past returns. The results are stronger among stocks primarily held by investors more prone to biased self-attribution. Our results provide direct support for the model of return predictability based on overconfidence and biased self-attribution