Overshooting
Overshooting refers to a phenomenon in financial markets where asset prices (such as exchange rates, stock prices, etc.) temporarily deviate from their long-term equilibrium levels due to external shocks or changes in market sentiment. Typically, overshooting occurs because market participants overreact to new information. Over time, the market price will gradually return to its reasonable equilibrium level. The overshooting phenomenon is especially common in foreign exchange markets, for instance, when a country's currency sharply depreciates or appreciates due to policy changes or economic events and then gradually returns to its normal level.
Definition: Overshooting refers to the phenomenon in financial markets where asset prices (such as exchange rates, stock prices, etc.) temporarily deviate from their long-term equilibrium levels due to external shocks or changes in market sentiment. Typically, overshooting is caused by market participants overreacting to new information. Over time, market prices gradually return to their reasonable equilibrium levels. The overshooting phenomenon is particularly common in the foreign exchange market. For example, a country's currency may suddenly depreciate or appreciate significantly due to policy changes or economic events, and then slowly return to normal levels.
Origin: The overshooting theory was first proposed by economist Rudiger Dornbusch in 1976. While studying exchange rate fluctuations, he found that short-term exchange rate fluctuations often exceeded changes in long-term equilibrium levels. This phenomenon is known as the "Dornbusch overshooting effect." This theory explains why exchange rates can experience dramatic short-term fluctuations and gradually return to equilibrium in the long term.
Categories and Characteristics: The overshooting phenomenon can be divided into two categories: positive overshooting and negative overshooting. Positive overshooting refers to asset prices temporarily exceeding their long-term equilibrium levels, while negative overshooting refers to asset prices temporarily falling below their long-term equilibrium levels. The characteristic of positive overshooting is that market sentiment is overly optimistic, and investors overreact to positive news; the characteristic of negative overshooting is that market sentiment is overly pessimistic, and investors overreact to negative news. Regardless of the type of overshooting, market prices will eventually return to their reasonable equilibrium levels.
Specific Cases:
- Case 1: In 2015, the Chinese stock market experienced a significant overshooting phenomenon. At that time, due to the market's overly optimistic reaction to government bailout policies, the stock market rapidly rose in the short term, then sharply fell due to a shift in market sentiment, eventually returning to a more reasonable level.
- Case 2: In early 2020, following the outbreak of the COVID-19 pandemic, global stock markets experienced dramatic negative overshooting. Investor panic over the pandemic led to a significant drop in stock markets, but as governments implemented economic stimulus measures, market sentiment gradually recovered, and stock markets gradually returned to pre-pandemic levels.
Common Questions:
- Question 1: Why does the overshooting phenomenon occur?
Answer: The overshooting phenomenon is usually caused by market participants overreacting to new information. When faced with sudden events or policy changes, investors often develop overly optimistic or pessimistic sentiments, causing asset prices to temporarily deviate from their long-term equilibrium levels. - Question 2: How can one determine if the market is in an overshooting state?
Answer: Determining whether the market is in an overshooting state requires considering multiple factors, including market sentiment, economic fundamental data, and technical analysis indicators. Significant price fluctuations and extreme changes in market sentiment are typical characteristics of overshooting.
