Overreaction hypothesis in the uk stock market essay

Conclusion By Nathan Reiff The concept of market efficiency assumes that new information about a security will be reflected more or less instantaneously in the price of that security in the market. In reality, though, this idealized expectation rarely comes to pass in such a clean, unimpeded fashion. Often, participants in the stock market actually overreact to new information, thereby creating an impact on the price of a security which is larger than it should be relative to the scope of the information.

Overreaction hypothesis in the uk stock market essay

It means that existing stock prices are determined with the help of complete information available.

Overreaction hypothesis in the uk stock market essay

The unnatural changes in stock prices are The unnatural changes in stock prices are basically due to biasness in human nature. Investors tend to overreact strongly to extreme news.

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Stock prices in the beginning of extremely bad news fall below their justified equilibrium price in the market and extremely good news has the reversal impact on the stock prices.

This study investigates the overreaction hypothesis in the listed companies of Cement sector of KSE listed companies. Data for this empirical work is collected from the period January to December The data relates to the unadjusted stock prices of five cement companies.

The secondary data is collected from AKD securities portfolios.

What is an 'Overreaction'

The stocks selected for the study are those which have the complete data of the prices. This study assumes that current stock prices of the cement sector of the company are efficient.

Striving to unfold further stock market inefficiencies researchers developed the stock market overreaction hypothesis which examines whether observed anomalous movements in stock prices, particularly reversals of extreme stock price changes, can be explained by the corrections of investors’ disproportionate reactions to new information. In this essay I describe what the efficient market hypothesis implies for the functioning of our financial markets. I suggest that a number of common and it is far from clear that systematic underreaction or overreaction to the stock market as a whole will be reflected in stock prices without delay. Thus. The overreaction hypothesis asserts that stock prices overreact to unexpected and dramatic news. The behavior of stock prices in New Zealand is examined after a large weekly change in price.

The study found evidence of existence of overreaction in stocks of cement sector as it is the case for all developing and developed countries stocks markets. However almost all the stated all the overreactions were statistically insignificant without eleventh and twelfth months.

The Overreaction Hypothesis: The Case of Ukrainian Stock Market - Munich Personal RePEc Archive

According to study the contrarian strategy may be adopted by the investors in the eleventh month. It is recommended that such studies may be conducted on the overall stocks of KSE Index to give us the idea of the existence of the overreaction in the Market.Overreaction is an emotional response to news about a security, led by either greed or fear, which causes it to become either overbought or oversold.

The overreaction hypothesis in the UK market: empirical analysis.

Overreaction hypothesis in the uk stock market essay

Khelifa Mazouz and Xiafei Li. Applied Financial Economics, , vol. 17, issue 13, Abstract: This article tests the overreaction hypothesis using data from the UK stock market. The study covers a period of 30 years (from to ).

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METHODOLOGY AND DATA Forming Winner and Loser Portfolios As a first test of the Overreaction Hypothesis in the UK stock market we use the same standard event study techniques which are used by DeBondt and Thjiler () and others.

Clare and Thomas () investigate the overreaction hypothesis in the United Kingdom (UK). Winner and loser portfolios are formed using monthly stock return data taken from the London Business School, which consist of the end-of-month dividend adjusted returns on all those stocks quoted on the London Stock Exchange.

Download Citation on ResearchGate | Testing the Overreaction Hypothesis in the UK Stock Market by Using Inter & Intra Industry Contrarian Strategies | This study mainly supports the Overreaction. Critical analysis of the implication of overreaction to the return predictability in UK stock market Over the past decades, overreaction has drawn attention from many economic researchers, the most significant studies being Jegadeesh and Titman, (), De Bondt and Thaler () proving the existence of .

The overreaction hypothesis in the UK market: empirical analysis