Abstract
Research in behavioral finance put forward that in violation of Bayes’ theorem rule and involving in Noise trading, majority of the investors in stock market tend to underreact or overreact to unanticipated bad and good news. One of the investor anomalies “Overreaction effect” in 30 firms listed in Pakistan Stock Exchange has been investigated in this study with the help of the portfolios of Loser and Winner Average Cumulative Abnormal Return’s. Moreover, the Random Walk is checked over the average prices of the same 30 firms listed in Pakistan stock market. This research of market efficiency took stocks data of randomly selected 30 firms listed in Pakistan Stock Exchange on weekly basis whether such investor’s anomalies affect stock prices. The result presents that there exist weak form of efficiency where the investor Overreaction present over many periods especially in global financial crises. Along with it, the Econometric test confirms the presence of Random Walk in the thirty firms of Pakistan stock market. Finally, the portfolios of loser Average Cumulative Abnormal Return’s outperformed that of portfolios of winner Average Cumulative Abnormal Return’s.
Highlights
Rules and regulations or any amendment made by regulatory body as Security Exchange Commission of Pakistan (SECP) can be considered directly influence on market and indirect influence can be from political, war nervousness of investor aspects which upset most of the investors in the market
To find the random walk in the thirty firms listed in Pakistan Stock Exchange, one of the best and standard econometric unit root test that bring concrete and accurate results is utilized in the study
This research has investigated the investor’s overreaction which includes of winner and loser ACAR’s in 30 firms that are listed in Pakistan Stock Exchange. These analyses suggest that various firm’s stock returns exhibit patterns which are consistent with investor’s anomalies in the stock market
Summary
The main theme of this research is to study and investigate the overreaction in different situations as well as Random Walk in the stock market. The indirect impact causes the fluctuation in the stock markets which are positively as well as adversely or decline the stock prices. These overreaction and under reaction of the investors are considered inconsistent with the efficient market hypothesis (EMH). Psychologists studied stock market investor anomalies in the financial terminologies and presented the fact that there exists overreaction and under reaction of investors trading in stock market which contradict the efficient market hypothesis of Fama (1970).
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