Stefanescu, Razvan and Dumitriu, Ramona and Nistor, Costel (2012): Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE. Published in: The 18th International Conference "The Knowledge-Based Organization" - Conference Proceedings 2 , Vol. 2, (8. June 2012): pp. 304-310.
Download (79kB) | Preview
Efficient Market Hypothesis states that financial markets react instantaneous and unbiased to new information. However, in the last decades empirical researches revealed some anomalies in investors reactions to the events that caused shocks on the financial markets. There are two main hypotheses to describe such behaviors. The first one - Overreaction Hypothesis stipulates that investors overreact on the day when a shock occurs and they correct on the next days by opposite actions. The second one - Underreaction Hypothesis considers that investors underreact on the day of a shock and they apply corrections on the next days by opposite actions. These behaviors are influenced by the nature of events that cause shocks and by some characteristics of the financial markets. In this paper we explore the short-term reactions that followed positive and negative shocks from the Romanian capital market, using daily values of the main indexes from the Bucharest Stock Exchange for a period of time between January 2005 and March 2011. Depending on the horizons taken into consideration and on the nature of the shocks we find evidences for the Efficient Market Hypothesis, Overreaction Hypothesis and the Underreaction Hypothesis. We also find that actual global crisis caused significant changes in the investors’ reactions to the shocks.
|Item Type:||MPRA Paper|
|Original Title:||Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE|
|English Title:||Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE|
|Keywords:||Efficient Markets, Overreaction Hypothesis, Underreaction Hypothesis, Romanian Capital Market|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Razvan Stefanescu|
|Date Deposited:||27. Sep 2012 10:28|
|Last Modified:||22. Aug 2015 14:01|
Chan K.C., On the contrarian investment strategy, Journal of Business 61, pp. 147–163, 1988.
Chan K. C., Narasimhan Jegadeesh, Josef Lakonsihok, Momentum Strategies, Journal of Finance 51, pp. 1681-1713, 1996.
Clare A. and Thomas S., The overreaction hypothesis and the UK stock market, Journal of Business Finance and Accounting, 22: pp. 961-973, 1995.
Cochrane, John H. Financial markets and the real economy. NBER Working Paper 11193, National Bureau of Economic Research, 2005.
Daniel Kent D., Hirshleifer David A. and Subrahmanyam Avanidhar, A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions February 19, 1997, Available at SSRN: http://ssrn.com/abstract=2017 or http://dx.doi.org/10.2139/ssrn.2017
Daniel K., Hirshleifer D., Subrahmanyam A., Investor Psychology and Security Market Under- and Overreactions, Journal of Finance, Vol. 53, pp. 1839 – 1886, 1998.
De Bondt W.F.M. and Thaler R.H., Does the stock market overreact? Journal of Finance, 40: pp. 793-805, 1985.
De Bondt W.F.M. and Thaler R.H., Further evidence on investor overreaction and stock market seasonality, Journal of Finance, 42: pp. 557-582, 1987.
Fama Eugene F., Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, Vol. 25, pp. 383-417, 1970.
Fama Eugene, Market Efficiency, Long-Term Returns and Behavioural Finance, Journal of Financial Economics, 49, pp. 283-306, 1998.
Fama Eugene F., Efficient capital markets: II, Journal of Finance 46: pp. 1575-1617, 1991.
Grossman Sanford J. and Stiglitz Joseph E., On the impossibility of informationally efficient markets, American Economic Review 70: pp. 393-408, 1980.
Jegadeesh Narasimhan, Titman Sheridan, Overreaction, Delayed Reaction, and Contrarian Profits, Review of Financial Studies, Vol. 8 No. 4, 1993, Available at SSRN: http://ssrn.com/abstract=7224
Lasfer M. A., Melnik A. and D. C. Thomas, Short term reaction of stock markets in stresfull circumstances, Journal of Banking and Finance, Vol. 27, pp. 1959-1977, 2003.
Rubinstein Mark, Rational markets: Yes or no? The affirmative case, Financial Analysts Journal 57: pp. 15-29, 2001.
Skala, Dorota, Overconfidence in Psychology and Finance, An Interdisciplinary Literature Review (September 1, 2008), Bank i Kredyt, No. 4, pp. 33-50, 2008. Available at SSRN: http://ssrn.com/abstract=1261907
Spyrou, S. Kassimatis, K. and Galariotis, E., Short Term Overreaction, Underreaction and Efficient Reaction: Evidence from the London Stock Exchange, SSRN paper series, pp. 1-47, 2005.
Yu Hsin-Yi and Chen Li-Wen, Momentum – Reversal Strategy, SSRN paper series, May 25, 2011. Available at SSRN: http://ssrn.com/abstract=1663266 or http://dx.doi.org/10.2139/ssrn.1663266
Zarowin P., Size, Seasonality and Stock Market Overreaction, Journal of Financial and Quantitative Analysis, 25, pp. 113-125, 1990.