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Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE

Author

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  • Stefanescu, Razvan
  • Dumitriu, Ramona
  • Nistor, Costel

Abstract

Efficient Market Hypothesis states that financial markets react instantaneous and unbiased to new information. However, in the last decades empirical researches revealed some anomalies in investors reactions to the events that caused shocks on the financial markets. There are two main hypotheses to describe such behaviors. The first one - Overreaction Hypothesis stipulates that investors overreact on the day when a shock occurs and they correct on the next days by opposite actions. The second one - Underreaction Hypothesis considers that investors underreact on the day of a shock and they apply corrections on the next days by opposite actions. These behaviors are influenced by the nature of events that cause shocks and by some characteristics of the financial markets. In this paper we explore the short-term reactions that followed positive and negative shocks from the Romanian capital market, using daily values of the main indexes from the Bucharest Stock Exchange for a period of time between January 2005 and March 2011. Depending on the horizons taken into consideration and on the nature of the shocks we find evidences for the Efficient Market Hypothesis, Overreaction Hypothesis and the Underreaction Hypothesis. We also find that actual global crisis caused significant changes in the investors’ reactions to the shocks.

Suggested Citation

  • Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2012. "Overreaction and underreaction on the BUCHAREST STOCK EXCHANGE," MPRA Paper 41555, University Library of Munich, Germany, revised 25 Sep 2012.
    • Handle: RePEc:pra:mprapa:41555
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    References listed on IDEAS

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    1. Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2012. "Short term momentum and contrarian profits on the Bucharest Stock Exchange before and during the global crisis," MPRA Paper 42510, University Library of Munich, Germany, revised 18 Sep 2012.
    2. Mynhardt, H. R. & Plastun, Alex, 2013. "The Overreaction Hypothesis: The Case of Ukrainian Stock Market," MPRA Paper 58941, University Library of Munich, Germany.
    3. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2018. "Short-Term Price Overreactions: Identification, Testing, Exploitation," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 913-940, April.

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    More about this item

    Keywords

    Efficient Markets; Overreaction Hypothesis; Underreaction Hypothesis; Romanian Capital Market;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G01 - Financial Economics - - General - - - Financial Crises

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