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Investors' Reactions to Extreme Events in the Hungarian Stock Market

Author

Listed:
  • Klaudia Radoczy

    (University of Pécs)

  • Akos Toth-Pajor

    (University of Pécs)

Abstract

This paper examines investors' reactions to extreme events in the Hungarian stock market. We seek to answer the research question whether following extreme events any overreaction of investors can be observed on the Budapest Stock Exchange. With a view to answering the research question, we identify extreme events based on extreme returns on the market portfolio and then - using an event study - we examine abnormal returns on winner and loser equities. After examining investors' reactions, we inspect the performance of the contrarian strategy in the created event windows. The main result of our research is the presentation that - based on the analysis of the differences between the average cumulative abnormal returns after extreme events - investor overreactions can be observed in the Hungarian stock market. The loser portfolios relating to extreme events significantly outperform winner portfolios connected to the event. The excess return of the contrarian strategy cannot be attributed to differences in the market risk of winner and loser portfolios. The excess return of the strategy can be shown only under tighter extreme value thresholds. The clustering of the event windows with short-term reversal, high market volatility and extreme events is beneficial to the performance of the contrarian strategy. In addition, our research also shows that the purchase of loser portfolios or the development of a contrarian strategy after extreme events may generate profit for investors, since after extreme events the loser portfolios usually beat the market on a horizon of 21 days.

Suggested Citation

  • Klaudia Radoczy & Akos Toth-Pajor, 2021. "Investors' Reactions to Extreme Events in the Hungarian Stock Market," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(3), pages 5-30.
    • Handle: RePEc:mnb:finrev:v:20:y:2021:i:3:p:5-30
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    References listed on IDEAS

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    More about this item

    Keywords

    extreme events; event study; overreaction; contrarian strategy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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