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Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange
The overreaction hypothesis, as postulated by De Bondt and Thaler (1985) dictates that “stocks that have performed poorly in the past (loser stocks) tend to outperform stocks that have performed well in the past (winner stocks)" (DeBondt, et al., 1985). On the other hand, the under-reaction hypothes...
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2014
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| _version_ | 1867613417184952320 |
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| access_status_str | Open Access |
| author | Ragab, Amira Yasser |
| author_browse | Ragab, Amira Yasser |
| author_facet | Ragab, Amira Yasser |
| author_sort | Ragab, Amira Yasser |
| collection | Thesis |
| dc_rights_str_mv | The author retains all rights with regard to copyright. The author certifies that written permission from the owner(s) of third-party copyrighted matter included in the thesis, dissertation, paper, or record of study has been obtained. The author further certifies that IRB approval has been obtained for this thesis, or that IRB approval is not necessary for this thesis. Insofar as this thesis, dissertation, paper, or record of study is an educational record as defined in the Family Educational Rights and Privacy Act (FERPA) (20 USC 1232g), the author has granted consent to disclosure of it to anyone who requests a copy. |
| description | The overreaction hypothesis, as postulated by De Bondt and Thaler (1985) dictates that “stocks that have performed poorly in the past (loser stocks) tend to outperform stocks that have performed well in the past (winner stocks)" (DeBondt, et al., 1985). On the other hand, the under-reaction hypothesis argues that stock's return shows momentum, whereby winner stocks continue to exhibit high returns in future periods, reflecting tendency of investors to under-weigh the extent of new information. The aim of this thesis is to investigate whether short-term overreaction or under-reaction appears in the Egyptian Exchange (EGX) over the period of January 1998 to December 2013, making this the first attempt to test these market anomalies in an Arab stock market. The thesis surveys the overreaction/under-reaction literature focusing on the differences in methodologies and results across the various sample markets and timeframes. The thesis compares two standard methodologies in the literature, that of Ali et al (2011) and Clare & Thomas (1995), to test the overreaction/under-reaction hypothesis over various holding periods ranging from one week to 52 weeks. The analysis reveals that while short-term overreaction doesn't exist in the Egyptian Exchange, there is statistically significant evidence of under-reaction for the holding periods of one to four weeks. This motivates further tests to establish the profitability of utilizing this evidence of under-reaction by applying a momentum strategy that invests in winner stocks. The results show that while a momentum strategy can provide significant abnormal returns of up to 0.885% over a holding period of four weeks, when trading costs are taken into account, the profitability of the momentum strategy becomes insignificant. The thesis further analyzes whether size of the company can explain the evidence of under-reaction. This is done on the basis of creating portfolios with large and small capitalization stocks. For large capitalization stocks, an under-reaction that is statistically significant over holding periods from 1 to 3 weeks is found. The overall result for this thesis suggests that while evidence of under-reaction appears for Egyptian listed stocks, this is concentrated in large firms. Investor, however, cannot profit from this market anomaly by applying a momentum strategy since after taking into account trading costs involved in trading Egyptian stocks, the profitability of this strategy diminishes. |
| format | Thesis |
| id | oai:fount.aucegypt.edu:etds-2258 |
| institution | American University in Cairo (Egypt) |
| last_indexed | 2026-06-10T12:35:48.888Z |
| license_str | Other — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from AUC Knowledge Fountain — bepress |
| publishDate | 2014 |
| publishDateRange | 2014 |
| publishDateSort | 2014 |
| publisher | AUC Knowledge Fountain |
| publisherStr | AUC Knowledge Fountain |
| record_format | dspace |
| source_str | AUC Knowledge Fountain — bepress |
| spelling | oai:fount.aucegypt.edu:etds-2258 Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange Ragab, Amira Yasser The overreaction hypothesis, as postulated by De Bondt and Thaler (1985) dictates that “stocks that have performed poorly in the past (loser stocks) tend to outperform stocks that have performed well in the past (winner stocks)" (DeBondt, et al., 1985). On the other hand, the under-reaction hypothesis argues that stock's return shows momentum, whereby winner stocks continue to exhibit high returns in future periods, reflecting tendency of investors to under-weigh the extent of new information. The aim of this thesis is to investigate whether short-term overreaction or under-reaction appears in the Egyptian Exchange (EGX) over the period of January 1998 to December 2013, making this the first attempt to test these market anomalies in an Arab stock market. The thesis surveys the overreaction/under-reaction literature focusing on the differences in methodologies and results across the various sample markets and timeframes. The thesis compares two standard methodologies in the literature, that of Ali et al (2011) and Clare & Thomas (1995), to test the overreaction/under-reaction hypothesis over various holding periods ranging from one week to 52 weeks. The analysis reveals that while short-term overreaction doesn't exist in the Egyptian Exchange, there is statistically significant evidence of under-reaction for the holding periods of one to four weeks. This motivates further tests to establish the profitability of utilizing this evidence of under-reaction by applying a momentum strategy that invests in winner stocks. The results show that while a momentum strategy can provide significant abnormal returns of up to 0.885% over a holding period of four weeks, when trading costs are taken into account, the profitability of the momentum strategy becomes insignificant. The thesis further analyzes whether size of the company can explain the evidence of under-reaction. This is done on the basis of creating portfolios with large and small capitalization stocks. For large capitalization stocks, an under-reaction that is statistically significant over holding periods from 1 to 3 weeks is found. The overall result for this thesis suggests that while evidence of under-reaction appears for Egyptian listed stocks, this is concentrated in large firms. Investor, however, cannot profit from this market anomaly by applying a momentum strategy since after taking into account trading costs involved in trading Egyptian stocks, the profitability of this strategy diminishes. 2014-06-01T07:00:00Z thesis application/pdf https://fount.aucegypt.edu/etds/1259 https://fount.aucegypt.edu/context/etds/article/2258/viewcontent/Over_20or_20under_reaction_20hypothesis_20in_20the_20Egyptian_20Stock_20Exchange.pdf The author retains all rights with regard to copyright. The author certifies that written permission from the owner(s) of third-party copyrighted matter included in the thesis, dissertation, paper, or record of study has been obtained. The author further certifies that IRB approval has been obtained for this thesis, or that IRB approval is not necessary for this thesis. Insofar as this thesis, dissertation, paper, or record of study is an educational record as defined in the Family Educational Rights and Privacy Act (FERPA) (20 USC 1232g), the author has granted consent to disclosure of it to anyone who requests a copy. Theses and Dissertations AUC Knowledge Fountain Hypothesis Stock exchanges |
| spellingShingle | Hypothesis Stock exchanges Ragab, Amira Yasser Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange |
| title | Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange |
| title_full | Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange |
| title_fullStr | Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange |
| title_full_unstemmed | Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange |
| title_short | Testing short-term over/ underreaction hypothesis: empirical evidence from the Egyptian stock exchange |
| title_sort | testing short term over underreaction hypothesis empirical evidence from the egyptian stock exchange |
| topic | Hypothesis Stock exchanges |
| url | https://fount.aucegypt.edu/etds/1259 https://fount.aucegypt.edu/context/etds/article/2258/viewcontent/Over_20or_20under_reaction_20hypothesis_20in_20the_20Egyptian_20Stock_20Exchange.pdf |
| work_keys_str_mv | AT ragabamirayasser testingshorttermoverunderreactionhypothesisempiricalevidencefromtheegyptianstockexchange |