Overreaction Effect in Indian Stock Market

Abstract

In this paper we examine if there is any overreaction effect present in Indian Stock market. We have used monthly closing adjusted prices of 500 stocks comprising S&P CNX 500 Equity Index over the period March, 1996 to March, 2007 and methodology as proposed by De Bondt and Thaler (1985) and Chan (1988). Our findings reveal a presence of statistically significant but asymmetric overreaction effect in Indian stock market. Contrarian investment strategy has been found to be economically feasible, generating abnormally positive returns on market-adjusted as well as risk-adjusted basis which are largely attributable to the extremely positive returns to loser stocks during the test period. Our findings cast serious objections against the informational efficiency of Indian stock market suggesting that investors can earn superior returns by making use of the information on past prices of securities.

Keywords: Contrarian investment strategy, losers, Overreaction effect, winners, zero-investment portfolio