Some Evidence on Short-Run Market Overreaction for the Kuala Lumpur Stock Exchange

Abstract

‘This study attempts to test for the existence of short-run overreaction among shares traded on the Kuala Lumpur Stock Exchange over the 1990s. A substantial literature based on data from devel- oped markets suggests that investors overreact to information such that returns exhibit a mean- reverting patter. This paper examines whether Malaysian returns exhibit a similar predictable pattem. For the past generation, the Efficient Market Hypothesis (EMH) has been one of the most domi- nant themes in finance literature. At its most basic level, this hypothesis argues that share price changes should not be predicted from historic data. However, a number of market anomalies have begun to emerge which have challenged this hypothesis. For example, empirical evidence sug- gests that share returns may be predictable in certain months of the ear (Gultekin and Gultekin; 1983), 0n certain days in the week (French; 1980) and at particular times in the trading day (Harris; 1986). In addition, shares of smaller companies (Banz; 1981) and low P/E companies (Basu; 1977, 1983) seem to exhibit a recurring pattern. However, one of the newest and most controver- sil of these anomalies i the hypothesis that the market tends to overreact to news. The overreac- tion effect suggests that investors overreact to new information and as a result share prices can and do depart from their underlying fundamental values. As investors recognise their mistake, share: prices return to equilibrium levels imparting a mean-reverting pattern on share returns.