IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v20y2010i15p1173-1183.html
   My bibliography  Save this article

Do unobservable factors explain the disposition effect in emerging stock markets?

Author

Listed:
  • Hisham Farag
  • Robert Cressy

Abstract

In a previous paper, we utilized panel data methods to explore both cross-sectional variations and time series effects within the post-event period for losers' stocks. Some of these effects are not observable, but ignoring them lays the estimation open to bias from concealed heterogeneity amongst firms and periods (Hsiao, 2004). In this article we re-examine our methodology to test whether past losers outperform past winners. Using daily data from the Egyptian stock market on a sample of 20 companies which experienced dramatic 1-day price change over the period 2005 to 2008, a two way Fixed Effects (FE) model reveals strong evidence of price reversal with period FE. Results support the disposition effect by selling winners short and buying losers. Firm size is negatively correlated with post-event Abnormal Returns (ARs) consistent with the argument that small firms have a greater tendency to price-reverse. However, temporary, unobservable time-specific phenomena common to all companies, together with permanent, unobservable company-specific factors are more important in explaining price reversals. We also find that, unobservable company-specific factors account for a much larger percentage of post-event variations in stock prices. These company effects are sufficiently large to suggest a profitable trading strategy.

Suggested Citation

  • Hisham Farag & Robert Cressy, 2010. "Do unobservable factors explain the disposition effect in emerging stock markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1173-1183.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:15:p:1173-1183
    DOI: 10.1080/09603101003781463
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603101003781463
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09603101003781463?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. J. Wang & B. M. Burton & D. M. Power, 2004. "Analysis of the overreaction effect in the Chinese stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 437-442.
    2. Chaoshin Chiao & David Cheng & Welfeng Hung, 2005. "Overreaction after Controlling for Size and Book-to-Market Effects and its Mimicking Portfolio in Japan," Review of Quantitative Finance and Accounting, Springer, vol. 24(1), pages 65-91, January.
    3. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
    4. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    5. Baytas, Ahmet & Cakici, Nusret, 1999. "Do markets overreact: International evidence," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1121-1144, July.
    6. Kim, Kenneth & Rhee, S Ghon, 1997. "Price Limit Performance: Evidence from the Tokyo Stock Exchange," Journal of Finance, American Finance Association, vol. 52(2), pages 885-899, June.
    7. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    8. Cox, Don R & Peterson, David R, 1994. "Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance," Journal of Finance, American Finance Association, vol. 49(1), pages 255-267, March.
    9. De Bondt, Werner F M & Thaler, Richard H, 1987. "Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    10. Gishan Dissanaike, 2002. "Does the Size Effect Explain the UK Winner‐Loser Effect?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1‐2), pages 139-154.
    11. Gishan Dissanaike, 2002. "Does the Size Effect Explain the UK Winner-Loser Effect?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1&2), pages 139-154.
    12. 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.
    13. Tawatnuntachai, Oranee & Yaman, Devrim, 2007. "Do investors overreact to earnings warnings?," Review of Financial Economics, Elsevier, vol. 16(2), pages 177-201.
    14. repec:bla:jfinan:v:44:y:1989:i:5:p:1385-99 is not listed on IDEAS
    15. Zamri Ahmad & Simon Hussain, 2001. "KLSE Long Run Overreaction and the Chinese New‐Year Effect," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1‐2), pages 63-105, January.
    16. Loughran, Tim & Ritter, Jay R, 1996. "Long-Term Market Overreaction: The Effect of Low-Priced Stocks," Journal of Finance, American Finance Association, vol. 51(5), pages 1959-1970, December.
    17. Oranee Tawatnuntachai & Devrim Yaman, 2007. "Do investors overreact to earnings warnings?," Review of Financial Economics, John Wiley & Sons, vol. 16(2), pages 177-201.
    18. Zamri Ahmad & Simon Hussain, 2001. "KLSE Long Run Overreaction and the Chinese New-Year Effect," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1-2), pages 63-105.
    19. Walid Saleh, 2007. "Overreaction: the sensitivity of defining the duration of the formation period," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 45-61.
    20. Antonios Antoniou & Emilios C. Galariotis & Spyros I. Spyrou, 2005. "Contrarian Profits and the Overreaction Hypothesis: the Case of the Athens Stock Exchange," European Financial Management, European Financial Management Association, vol. 11(1), pages 71-98, January.
    21. Georgina Benou & Nivine Richie, 2003. "The reversal of large stock price declines: The case of large firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(1), pages 19-38, March.
    22. Jegadeesh, Narasimhan & Titman, Sheridan, 1995. "Overreaction, Delayed Reaction, and Contrarian Profits," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 973-993.
    23. Conrad, Jennifer & Kaul, Gautam, 1993. "Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March.
    24. Zarowin, Paul, 1990. "Size, Seasonality, and Stock Market Overreaction," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(1), pages 113-125, March.
    25. Bremer, Marc & Sweeney, Richard J, 1991. "The Reversal of Large Stock-Price Decreases," Journal of Finance, American Finance Association, vol. 46(2), pages 747-754, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boubaker, Sabri & Farag, Hisham & Nguyen, Duc Khuong, 2015. "Short-term overreaction to specific events: Evidence from an emerging market," Research in International Business and Finance, Elsevier, vol. 35(C), pages 153-165.
    2. Farag, Hisham, 2015. "The influence of price limits on overreaction in emerging markets: Evidence from the Egyptian stock market," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 190-199.
    3. Hisham Farag, 2014. "Investor overreaction and unobservable portfolios: evidence from an emerging market," Applied Financial Economics, Taylor & Francis Journals, vol. 24(20), pages 1313-1322, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hisham Farag, 2015. "Long-term Overreaction, Regulatory Policies and Stock Market Anomalies: Evidence from Egypt," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 112-139, August.
    2. Robert Cressy & Hisham Farag, 2011. "Do size and unobservable company factors explain stock price reversals?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(1), pages 1-21, January.
    3. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.
    4. Stuart Locke & Kartick Gupta, 2009. "Applicability of Contrarian Strategy in the Bombay Stock Exchange," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 165-189, May.
    5. Dumitriu, Ramona & Stefanescu, Razvan & Nistor, Costel, 2012. "Reactions of the capital markets to the shocks before and during the global crisis," MPRA Paper 41540, University Library of Munich, Germany, revised 10 Jan 2012.
    6. Hisham Farag, 2014. "Investor overreaction and unobservable portfolios: evidence from an emerging market," Applied Financial Economics, Taylor & Francis Journals, vol. 24(20), pages 1313-1322, October.
    7. McInish, Thomas H. & Ding, David K. & Pyun, Chong Soo & Wongchoti, Udomsak, 2008. "Short-horizon contrarian and momentum strategies in Asian markets: An integrated analysis," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 312-329.
    8. Asiya Sohail & Attiya Yasmin Javid, 2014. "The Global Financial Crisis and Investors’ Behaviour; Evidence from the Karachi Stock Exchange," PIDE-Working Papers 2014:106, Pakistan Institute of Development Economics.
    9. Borgards, Oliver & Czudaj, Robert L., 2020. "The prevalence of price overreactions in the cryptocurrency market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    10. Alves, Paulo & Carvalho, Luís, 2020. "Recent evidence on international stock market’s overreaction," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    11. Boubaker, Sabri & Farag, Hisham & Nguyen, Duc Khuong, 2015. "Short-term overreaction to specific events: Evidence from an emerging market," Research in International Business and Finance, Elsevier, vol. 35(C), pages 153-165.
    12. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2019. "Long-term price overreactions: are markets inefficient?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 657-680, October.
    13. Supriya Maheshwari & Raj S. Dhankar, 2017. "Profitability of Volume-based Momentum and Contrarian Strategies in the Indian Stock Market," Global Business Review, International Management Institute, vol. 18(4), pages 974-992, August.
    14. Ising, Jan & Schiereck, Dirk & Simpson, Marc W. & Thomas, Thomas W., 2006. "Stock returns following large 1-month declines and jumps: Evidence of overoptimism in the German market," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(4), pages 598-619, September.
    15. Dao, Thong M. & McGroarty, Frank & Urquhart, Andrew, 2016. "A calendar effect: Weekend overreaction (and subsequent reversal) in spot FX rates," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 158-167.
    16. Lobe, Sebastian & Rieks, Johannes, 2011. "Short-term market overreaction on the Frankfurt stock exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 113-123, May.
    17. Domian, Dale L. & Louton, David A. & Mossman, Charles E., 1998. "The rise and fall of the "Dogs of the Dow"," Financial Services Review, Elsevier, vol. 7(3), pages 145-159.
    18. Plastun, Alex & Sibande, Xolani & Gupta, Rangan & Wohar, Mark E., 2021. "Evolution of price effects after one-day abnormal returns in the US stock market," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    19. Jalal Shah & Attaullah Shah, 2018. "Contrarian and Momentum Investment Strategies in Pakistan Stock Exchange," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 57(3), pages 253-282.
    20. Muhammad Kashif & Sanyah Saad & Imran Umer Chhapra & Farhan Ahmed, 2018. "An Empirical Evidence of Over Reaction Hypothesis on Karachi Stock Exchange (KSE)," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(4), pages 449-465, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:20:y:2010:i:15:p:1173-1183. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.