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Contrarian strategy and overreaction in foreign exchange markets


  • Parikakis, George S.
  • Syriopoulos, Theodore


This paper investigates patterns to assist investors to forecast future exchange rate movements. We test for overreaction and underreaction examining exchange rate changes following excess 1-day fluctuations for currencies in two emerging (Turkey, Brazil) and two developed (US, UK) countries. Using euro as the base currency, we identify that the Turkish lira, the Brazilian real and the US dollar overreact, while the British pound underreacts. In the case of British pound, asymmetric responses and lack of volatility are two crucial factors to reject overreaction. Also, we find that contrarian strategy can be used in all currency markets for profitable investments.

Suggested Citation

  • Parikakis, George S. & Syriopoulos, Theodore, 2008. "Contrarian strategy and overreaction in foreign exchange markets," Research in International Business and Finance, Elsevier, vol. 22(3), pages 319-324, September.
  • Handle: RePEc:eee:riibaf:v:22:y:2008:i:3:p:319-324

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    References listed on IDEAS

    1. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    2. repec:hrv:faseco:30747159 is not listed on IDEAS
    3. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    4. Peterson, David R, 1995. "The Influence of Organized Options Trading on Stock Price Behavior following Large One-Day Stock Price Declines," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(1), pages 33-44, Spring.
    5. Grant, James L. & Wolf, Avner & Yu, Susana, 2005. "Intraday price reversals in the US stock index futures market: A 15-year study," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1311-1327, May.
    6. Stephen J. Larson & Jeff Madura, 2003. "What Drives Stock Price Behavior Following Extreme One-Day Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(1), pages 113-127.
    7. Nam, Kiseok & Pyun, Chong Soo & Avard, Stephen L., 2001. "Asymmetric reverting behavior of short-horizon stock returns: An evidence of stock market overreaction," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 807-824, April.
    8. Akhigbe, Aigbe & Gosnell, Thomas & Harikumar, T, 1998. "Winners and Losers on NYSE: A Re-examination Using Daily Closing Bid-Ask Spreads," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(1), pages 53-64, Spring.
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    Cited by:

    1. Wan, Jer-Yuh & Kao, Chung-Wei, 2009. "Evidence on the contrarian trading in foreign exchange markets," Economic Modelling, Elsevier, vol. 26(6), pages 1420-1431, November.
    2. Bahloul, Walid & Bouri, Abdelfettah, 2016. "Profitability of return and sentiment-based investment strategies in US futures markets," Research in International Business and Finance, Elsevier, vol. 36(C), pages 254-270.
    3. repec:eee:riibaf:v:42:y:2017:i:c:p:1445-1454 is not listed on IDEAS
    4. Chen, Pei-wen & Huang, Han-ching & Su, Yong-chern, 2014. "The central bank in market efficiency: The case of Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 239-260.
    5. Dao, Thong M. & McGroarty, Frank & Urquhart, Andrew, 2016. "A calendar effect: Weekend overreaction (and subsequent reversal) in spot FX rates," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 158-167.

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