Overreaction in futures markets
Market efficiency is tested in futures markets by forming portfolios of futures contracts on the basis of previous price changes. Contracts with extreme positive (negative) price change are added to winner (loser) portfolios. Market efficiency requires the expected return on these two portfolios to be statistically equal. Buy-and-hold portfolios from sixty-six futures markets from a sample period of January, 1964 to April, 1992 are formed to test for the existence of risk premiums. This study extends DeBondt and Thaler (1985) by applying a similar strategy to futures markets where selection bias should not be a problem;Contrary to their findings, winners continue to significantly outperform losers at horizons of six to eighteen months. Little evidence of overreaction is found but the persistence in prices causes rejection of market efficiency. Significant returns ranging from five to seven percent are observed for the buy-and-hold portfolio. This is interpreted to be evidence of an overall risk premium in futures markets.