Short-Term Overreaction: Implications For Stock Market Efficiency In Malaysia
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Date
2008
Authors
DHAMOTHARAN, LALITHA
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Abstract
This study empirically investigates the short-term behaviour of stocks listed on
the main board of Bursa Malaysia during the period of January 2000 to December
2007. The objectives were to determine whether the overreaction phenomenon occurs
during this time frame as well as assert whether investors can profit by exploiting this
anomaly and further extend the investigations to determine if the excess profits would
be feasible after incorporating transaction costs.
The findings of this research provide mixed results. Price reversals were
observed when comparing the period as a whole, but the results were not statistically
significant. It was concluded that during a normal cycle with less turbulence caused
by a crisis, the market did not portray traces of overreaction. As a matter of relevance
to investors and analysts who might want to gauge how the market moves during
different cycles, this research provides a comparison of the findings during two time
frames, the past decade that involves the financial crisis period with the current post
crisis period or normal cycle. The results signify that during the bullish period, only
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the loser portfolio exhibited reversals whereas the winner portfolio exhibited
momentum during the pre-crisis period. On the contrary, during the bearish period,
only the post crisis period seems. to exhibit overreaction with significant excess
profits. Thus, this study concludes that during normal cycle and the bullish period of a
normal cycle, the Malaysian market can be considered to be weak form efficient.
During the bearish period of the nonnal cycle, the market shows some signs of
reversals for the winner and arbitrage portfolios and the study attributes these findings
to overreaction.
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Keywords
Short-Term Overreaction , Implications For Stock Market Efficiency In Malaysia