The Abnormal Returns of Best And Worst Performing Stocks in Different Sectors AND Testing Overrection Hypothesis With Different Models: The Case of Istanbul Stock Exchange

Abstract

De Bondt and Thaler (1985) developed Overreaction Hypothesis as a price anomaly which violates the Efficient Market Hypothesis in financial markets. They argued that investors fail to behave rationally and that they use subjective judgment instead of objective analysis. Overreaction Hypothesis states that expecting that losers will be losing (winners will be winning), investors overreact to recent price discrepancies in the market while this inefficiency is corrected in the long-run. Conrad and Kaul (1993) criticized the Overreaction Hypothesis such that it was argued that abnormal return observed is the result of January Effect and a statistical bias together. The Overreaction Hypothesis has been tested in Turkey by researchers and the methodology developed by De Bondt and Thaler (1985) was used. In this study, the methodology suggested by Conrad and Kaul (1993) was used as well. The financial markets, Main Market and Star Market, in Istanbul Stock Exchange was tested for Overreaction Hypothesis with both methodologies. Moreover, the sub-markets which are Financial Market, Metal Market and Stone &Soil Market were examined. The abnormal returns were also tested if the results were statistically significant. To sum up, the abnormal returns observed were found to be statistically insignificant. It was concluded that overreaction is not observed in İstanbul Stock Exchange.