A Rebound after a Sharp Fall of Stock Markets—Comparing a Simulation Study—

Abstract

Prices of stock markets sometimes rebound after a sharp fall. Many empirical studies show that the rebounds reach statistical significance and propose an Over Reaction Hypothesis. In this study shows that TOPIX include dividends, a Japanese stock market index, also rebounds statistical significantly after a sharp fall and build a theoretical model consistent with previous simulation study results. The result shows that a market price fall down less than a fundamental price, which means most fundamentalist agents estimate by fundamentals, after that, the market price rebounds to the fundamental price. Therefore the rebound mechanism does not need to include the Over Reaction Hypothesis. In addition, there is a possibility that even if there are only fundamental agents, we can explain a volatility clustering which is not explained by Efficient Market Hypothesis. We emphasize that this study build the theoretical model consistent with simulation studies and empirical studies, and few such study has yet been conducted.