The Stocks Market Overreaction On The Kuala Lumpur Stock Exchange (Klse)
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Date
2000-05
Authors
Tjan, Suwandi
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Abstract
This paper examines the short run overreaction in Malaysian stocks returns
from January to December 1997. The main objectives of this study are (1) to examine
whether stocks which perfonned extremely well in recent past (winners) tend to do
less well in the following period and stocks which performed extremely bad in a
period (losers) will perform better in the next period as claimed by the overreaction
hypothesis. (2) to examine whether investors are able to earn abnonnal profit by
buying losers and selling winners short. The top and worst 10 weekly performing
stocks as reported by The Sun are used to define winners and losers. The performance
of these stocks measured by market excess return, are then tracked in the following 3
weeks to see if there is any reversals in the performance.
The results of the test indicate that there are indeed some degrees of.,.return
reversals. The excess returns of winners tend to be negative for the next three weeks
subsequent to the ranking period. The excess return of losers are still negative in the
test period, the magnitude of negative excess returns has been reduced. Results of
another test reveals that a trading strategy of buying losers and selling winners short
will not yield any positive abnormal return. In fact, investors may lose their money by
employing that strategy. Even though to some extent past prices can be used to predict
future prices, this study concludes the market is quite efficient in its weakest form.
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Keywords
Investments , Stock exchanges