Stock Overreaction Behaviour in Bursa Malaysia: Does the Length of the Formation Period Matter?

This paper investigates whether stock overreaction behaviour in Malaysian stock market is sensitive to the length of the formation period. Using the basic framework of De Bondt and Thaler (1985), this study find that stock overreaction behaviour in this market is sensitive to the length of the formation period. Significant evidence of stock overreaction effect is documented in the longer formation period of up to 5-year, while for the medium formation period of 2-year, there is no clear evidence of stock overreaction behaviour. Evidence of stock overreaction behaviour is also reported for the shorter-term of 1-year, however, it may not be economically profitable after taken into account the transaction cost. This study also shows that size cannot explain the documented overreaction effect. However, the results suggest that the overreaction effect subsided after adjustment to time-varying risk

Stock overreaction and financial bubbles: Evidence from Malaysia

This paper attempts to seek linkage between stock overreaction behaviour and financial bubbles in the Malaysian stock market. Monthly data over a period between January 1987 and December 2006 shows no clear evidence of stock overreaction behavior in the market. However, when the study split the analysis into two sub-periods, evidence of stock overreaction behaviour becomes significant in the pre-crisis sub-period, but there is no significant evidence of financial bubbles in the same sub-period. During the post crisis, evidence of stock overreaction seems to diminish, and evidence of financial bubbles however, is observed in the period. This study believes that evidence of bubbles observed in the Malaysian stock market in the post crisis period is due to stock overreaction that took place in the market prior to the crisis

The time-varying nature of the overreaction effect: evidence from the UK

Previous studies on the overreaction effect in the UK show that prior losers consistently outperform prior winners in the period 1975 to 1990. This paper extends current knowledge by assessing the above phenomenon in the UK market for the period 1987 to 2007. In contrast to earlier research, we produce evidence of a weak presence of the overreaction effect for the latest test period. Further, we show that, after adjusting for size, the overreaction effect almost disappears and any additional excess post-formation return to prior-losers is attributable to market cycles. This study implies that the presence of the overreaction effect in the UK stock market is time-varying and difficult to exploit in practice

An overreaction implementation of the coherent market hypothesis and option pricing

Inspired by the theory of social imitation (Weidlich 1970) and its adaptation to financial markets by the Coherent Market Hypothesis (Vaga 1990), we present a behavioral model of stock prices that supports the overreaction hypothesis. Using our dynamic stock price model, we develop a two factor general equilibrium model for pricing derivative securities. The two factors of our model are the stock price and a market polarization variable which determines the level of overreaction. We consider three kinds of market scenarios: Risk-neutral investors, representative Bernoulli investors and myopic Bernoulli investors. In case of the latter two, risk premia provide that herding as well as contrarian investor behaviour may be rationally explained and justified in equilibrium. Applying Monte Carlo methods, we examine the pricing of European call options. We show that option prices depend significantly on the level of overreaction, regardless of prevailing risk preferences: Downward overreaction leads to high option prices and upward overreaction results in low option prices. --behavioral finance,coherent market hypothesis,market polarization,option pricing,overreaction,chaotic market,repelling market

Proceedings of the Conference on Emerging Economic Issues in a Globalizing World

In this paper, we empirically examine the short term overreaction effect in the Istanbul Stock Exchange using daily stock data from January 1999 to December 2003. The study period covers the pre- and post- Turkish financial crisis period. Consistent with other prior studies on other markets, we find evidence of short term overreaction effect in the Istanbul Stock Exchange prior and post financial crisis. Our analysis highlights that stocks that display a large price increase (winners) show an evidence of overreaction in the short run, however, stocks that display a large price decline (losers) indicate no significant evidence. We also find the price reversal for winners in pre-crisis period is more pronounced than in post-crisis period. These results indicate a diminished degree of overreaction after the crisis period which may be attributable to the behaviors of traders.short term overreaction effect, Istanbul Stock Exchange

Does bursa Malaysia overreact?

Findings for the whole period from January 1987 to December 2006 reveal that loser has insignificantly becomes loser and winner has significantly reversed in the subsequent period. Arbitrage portfolio does not provide any significant abnormal return thus, not consistent with the overreaction hypothesis. This is due to the reason that Malaysian investors are overoptimistic. After controlling for size, both small and large stocks have significantly support the overreaction hypothesis even after adjustment for difference in risk. No evidence of January effect is reported during the period; however, there is evidence of Chinese New Year effect documented in the findings. The study also shows that Malaysian Stock Market overreacts prior to 1997 Asian Financial crisis. During the post crisis, the results are not consistent with overreaction hypothesis. One possible reason to this behaviour is that investors are more aware of the phenomenon and have altered their trading strategy. As a result, overreaction behaviour diminishes and stock market gradually becomes efficient in the post crisis. These findings suggest that stock overreaction behaviour in Malaysian stock market only benefited the short-term investors. However, when the strategy is based on a longer formation period such as 5-year formation period, long-term investors are able to earn significant positive abnormal returns

Does Syariah-Compliant stocks overreact?

This is a preliminary study on stock overreaction behavior of syariah compliant stock in Bursa Malaysia over the period between January 1988 and December 2009. Results show that syariah compliant stock in Bursa Malaysia, like their conventional counterparts overreact. The overreactions are more pronounced during the sub-period prior to 1997 Asian Financial Crisis and Global 2008 Crisis. After the crisis the overreaction behavior seems to diminish

Overreaction and investment choices : an experimental analysis

We study the degree of overreaction and the relation of overreaction and psychological biases as well as financial consequences of overreaction in a controlled experimental setting with 104 participants. The majority of participants tend to overreact, however, the degree of overreaction is heterogeneous. A few subjects even underreact. We also measure the overconfidence of the participants with a miscalibration scale. In line with theoretical predictions we find that more overconfident subjects overreact more. We also find that overreaction is associated with higher levels of risk taking after good signals and lower levels of risk taking after bad signals. Finally, overreaction harms portfolio efficiency, as measured by the Sharpe ratio

Individual Analysts Earnings Forecasts: Evidence For Overreaction In The UK Stock Market

This paper presents an analysis of two forms of overreaction (generalized overreaction and overreaction to prior earnings changes) in analysts earnings forecasts for the UK stock market, using a sample of individual forecasts of earning per share from a British investment bank over the period 1989-2002. Given that previous UK empirical research over 1980s and mid 90s has provided limited and contradictory findings, we investigate whether and how overreaction of analysts forecasts varies across forecast horizons, firm size (small and large) and growth opportunities (high and low P/E ratio) in order to provide further and comparable evidence. Overall, our findings support the generalized overreaction hypothesis but reject the firm size effect, the overreaction for high P/E ratio companies and the higher overreaction regarding the forecasting horizon. Keywords: Overreaction, Underreaction, Analysts forecasts, forecast horizons, size effect, price/earnings ratio

The Death of the Overreaction Anomaly? A Multifactor Explanation of Contrarian Returns

Are the returns accruing to De Bondt and Thaler’s (1985) (DT) much celebrated overreaction anomaly pervasive? Using the CRSP data set used by for the period 1926 through 1982, and, for the first time, an additional two decades of data (1983 through 2003), we provide preliminary support for the original work of DT, reporting that the overreaction anomaly has not only persisted over the past twenty years but has increased, on a risk-unadjusted basis. However, using the three factor model of Fama and French (1993) (FF), we find no statistically significant alpha can be garnered via the overreaction anomaly, with contrarian returns driven by the factors of size and value, not the behavioral biases of investors. It is our conjecture that the anomaly is not robust under the FF framework, with ‘contrarian’ investors following such a scheme simply compensated for the inherent portfolio risk held.Overreaction, anomaly, multifactor asset pricing model