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Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE

  • Stefanescu, Razvan
  • Dumitriu, Ramona
  • Nistor, Costel

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41555.

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Date of creation: 12 Apr 2012
Date of revision: 25 Sep 2012
Handle: RePEc:pra:mprapa:41555
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  1. 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.
  2. Spyros Spyrou & Konstantinos Kassimatis & Emilios Galariotis, 2007. "Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 17(3), pages 221-235.
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  8. Skala, Dorota, 2008. "Overconfidence in Psychology and Finance – an Interdisciplinary Literature Review," MPRA Paper 26386, University Library of Munich, Germany.
  9. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
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