Analysis of Investor Overreaction Effect and Random Walk: A Case Study of Pakistan Stock Exchange

Abstract

Research in behavioral finance put forward that in violation of Bayes’ theorem rule and involving in Noise trading, majority of the investors in stock market tend to underreact or overreact to unanticipated bad and good news. One of the investor anomalies “Overreaction effect” in 30 firms listed in Pakistan Stock Exchange has been investigated in this study with the help of the portfolios of Loser and Winner Average Cumulative Abnormal Return’s. Moreover, the Random Walk is checked over the average prices of the same 30 firms listed in Pakistan stock market. This research of market efficiency took stocks data of randomly selected 30 firms listed in Pakistan Stock Exchange on weekly basis whether such investor’s anomalies affect stock prices. The result presents that there exist weak form of efficiency where the investor Overreaction present over many periods especially in global financial crises. Along with it, the Econometric test confirms the presence of Random Walk in the thirty firms of Pakistan stock market. Finally, the portfolios of loser Average Cumulative Abnormal Return’s outperformed that of portfolios of winner Average Cumulative Abnormal Return’s.