Short Term Overreaction Effect: Evidence on the Turkish Stock Market

Title Short Term Overreaction Effect: Evidence on the Turkish Stock Market
Author Gülin Vardar, Berna Okan
Years 2008

 

Theoretical Basis In this paper, we empirically examine the short term overreaction effect in the Istanbul Stock Exchange using daily stock data from January 1999 to December 2003. The study period covers the pre- and post- Turkish financial crisis period.

The main purpose of this paper is to contribute to the short term overreaction literature by using daily return stock data of Istanbul Stock Exchange over the period of 1999- 2003. The reason of selecting this time period is to investigate the impact of the February 2001 Turkish financial crisis.

Methods and Subjects For the empirical analysis, daily closing prices of 190 stocks traded in one of the major Turkish equity indices (ISE) are examined for the 4-year period between January 1999 and December 2003. These sample data were obtained from the IBS. We divide the sample period into two sub-periods. The whole sample period consists of 1216 trading days in which the first consists of 500 trading days from January 5, 1999 through

January 31, 2001 and the second period is composed of 716 trading days from February 1, 2001 through December 31, 2003.

Main Result
  1. Average Daily Abnormal Returns for ISE-100 Stocks that indicates a large one day price increase or decrease within the period of January 5, 1999 through January 31, 2001

The large negative return that occurs on day t = 0 is the result of the large decline in price. As opposed to the winners, price reversals for losers can not be obtained in the pre-crisis period which can be interpreted as no evidence of overreaction.

  1. Average Daily Abnormal Returns for ISE-100 Stocks that indicates a large one day price increase or decrease within the period of February 1, 2001 through December 31, 2003

The average daily abnormal returns for the winners and losers in period 2001-2003 are shown in Table 2. Consistent with the results in the pre-crisis period, we document the evidence of overreaction for the winners but not for the losers in the post-crisis period. After a large price increase for winners, a significant price reversals occur on day t = 4 at 10% level while the average daily abnormal returns are negative but not statistically significant for six of the seven days following the day t = 0.

 

These results indicate that the stock market is more efficient than expected after the crisis, meaning that exhibiting less overreaction. To avoid the risk during the crisis period, investors become more conservative toward bad news and information. With the decrease of noise traders in the crisis, the importance of overreaction also decreases. However, when investors receive good news and information, the initial price increases in stocks encourage the noise traders to invest which leads to an increase the magnitude of overreaction.

Conclusion This paper highlights the empirical evidence of short term overreaction in the Turkish stock market. It differs from the previous studies in that this study considers the impact of the Turkish financial crisis by decomposing the whole sample into two sub periods, pre- and post-crisis period. These results indicate a diminished degree of overreaction after the crisis period which may be attributable to the behaviors of traders.

 

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