Critical Analysis of the Implication of Overreaction to the Return Predictability in Uk Stock Market
Critical analysis of the implication of overreaction to the return predictability in UK stock market
Over the past decades, overreaction has drawn attention from many economic researchers, the most significant studies being Jegadeesh and Titman, (1993), De Bondt and Thaler (1985) proving the existence of overreaction. In their framework, they violated the EMH assumption. Then many later studies examined the overreaction effect through different market anomalies with One of the important anomalies being arbitrage trading strategies.
This paper will follow the Jegadeesh and Titman, (1993) framework and the Hons and Tonks (2002) method to construct a momentum strategy for UK market with winner and loser portfolio. The aim of this research is to examine if overreaction trends can be predicted and used to generate arbitrage trading profit.
In this paper, the finding suggested there is no overreaction in the UK FTSE 100 stock market. Due to the sample being big companies, the absence of small companies may have diminished the overreaction effect.
I would like to take this opportunity to express my appreciation to all the teaching staff with their help and especially my tutor Toby Watson who has given me a lot of attention and valuable advice to help me through the whole dissertation process.
Table of Content
Chapter 1 Introduction
1.1 Research Aim
1.2 Research Objective
1.3 Structural layout of research
Chapter 2 Literature Review
2.1 Overreaction Hypothesis
2.2 A criticism of efficient market hypothesis on return predictability
2.3 A relation between investors decision making and stock return
2.4 Measurement interval on overreaction study
2.5 Overreaction in UK market
2.6 Overreaction versus sizes effect
2.7 Trading strategies to determine overreaction
2.8 Overreaction to return predictability
Chapter 3 Methodology
3.1 Data
3.2 Portfolio formation based on momentum strategy
3.3 Testing the return predictability
Over the past decades, overreaction has drawn attention from many economic researchers, the most significant studies being Jegadeesh and Titman, (1993), De Bondt and Thaler (1985) proving the existence of overreaction. In their framework, they violated the EMH assumption. Then many later studies examined the overreaction effect through different market anomalies with One of the important anomalies being arbitrage trading strategies.
This paper will follow the Jegadeesh and Titman, (1993) framework and the Hons and Tonks (2002) method to construct a momentum strategy for UK market with winner and loser portfolio. The aim of this research is to examine if overreaction trends can be predicted and used to generate arbitrage trading profit.
In this paper, the finding suggested there is no overreaction in the UK FTSE 100 stock market. Due to the sample being big companies, the absence of small companies may have diminished the overreaction effect.
I would like to take this opportunity to express my appreciation to all the teaching staff with their help and especially my tutor Toby Watson who has given me a lot of attention and valuable advice to help me through the whole dissertation process.
Table of Content
Chapter 1 Introduction
1.1 Research Aim
1.2 Research Objective
1.3 Structural layout of research
Chapter 2 Literature Review
2.1 Overreaction Hypothesis
2.2 A criticism of efficient market hypothesis on return predictability
2.3 A relation between investors decision making and stock return
2.4 Measurement interval on overreaction study
2.5 Overreaction in UK market
2.6 Overreaction versus sizes effect
2.7 Trading strategies to determine overreaction
2.8 Overreaction to return predictability
Chapter 3 Methodology
3.1 Data
3.2 Portfolio formation based on momentum strategy
3.3 Testing the return predictability
Bibliography: 2.2 A criticism of efficient market hypothesis on return predictability As De Bondt and Thaler (1985)’s arbitrage portfolio has showed a significant return 2.4 Measurement interval on overreaction study The overreaction effect was suggested by three pioneer studies Shiller (1981, 1984) and De Bondt and Thaler (1985)