The irrational behaviour of investors and its impact on stock price movements
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Date
2009
Authors
Toh, Guat Guan
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Abstract
Is the Efficient Market Hypothesis (EMH) still alive in the real world if the rationality
assumption does not hold? Since markets consist of human beings, it seems logical that
explanations rooted in the psychological attributes of investors would shed some light on
stock market behaviour. This research attempts to use the event study methodology to
investigate whether investors’ irrational behaviour could explain stock price movement.
There are four main findings of this study. Firstly, Malaysian investors are attentiondriven.
Their trading behaviour is biased toward attention-grabbing events, namely daily
abnormal trading volume and daily extreme price changes. Secondly, investors’
judgement exhibits reference dependence. They use 52-week high and 52-week low as a
reference point to guide them in making trading decisions. However, investors are not
biased by representativeness and availability heuristics. Thirdly, attention-based
strategies do not generate positive abnormal returns except for the strategy of buying
portfolios of loser-stocks. Lastly, 52-week high and 52-week low seem to affect
portfolio returns. Portfolios whose current stock price exceeds (fall below) its 52-week
high (52-week low) underperform (outperform) the market in the subsequent period. The
results of this study have some implications on financial theories. Investors are
irrational. The psychological attributes of investors tend to cause excessive trading in the
market. This could give a serious challenge to the rationality assumption of the EMH.
Attention-based strategies, especially that of buying portfolios of loser-stocks yield
positive abnormal returns in the short-run, but the promising returns automatically
disappear in the longer horizon. Hence, we conclude that Malaysian market remain
efficient in the long run.
Description
PhD
Keywords
Management , Irrational behaviour , Stock price movements , Bursa Malaysia