Overreaction in Trading: Evidence from the Intraday Trading of SPDRs

Using intraday trading data from the Standard and Poor's Depository Receipt (SPDR) market, this study tests whether traders are making trades based on accurate information. In addition, this thesis examines the effect of pricing error on trade price. If traders are rational, and have accurate information, they will likely purchase an asset at a premium (discount) if they have reason to believe that the fundamental value of that asset will increase (decrease). This theory is tested using regression analysis to determine if trade price is predictive of fundamental value. We find no evidence that trading price of SPDRS significantly predicts the movement of underlying value. The results suggest that traders are likely overreacting to disparities between price and underlying value.