Short-term Overreaction Phenomenon in German Stock exchange: Comparative Study of Technology Firms and Traditional Firms
Väliheikki, Ville (2007)
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The purpose of the thesis is to find out whether there is a possibility to earn short-term overreaction based abnormal returns in German Stock Exchange and test the market efficiency of German Stock Markets. In addition, the comparative study between the Technology firms and Traditional firms is conducted in order to make judgment whether the higher level of uncertainty pertaining to Technology stocks’ prices increase the magnitude of possible overreaction based contrarian profits. The research period is 2002–2006.
Research data includes logarithmic return series of those stocks that are listed in Prime All Share Index and the market return is proxied by the return of the Prime All Share Index. The methodology of the thesis is similar to that of Lo and MacKinlay (1990) and Jegadees and Titman (1993). In addition to market wide analysis, stocks are examined in a sub sample environment in order to uncover possible differences in overreaction between the two industry classes.
According to the results contrarian strategy of buying prior losers and short-selling prior winners is not profitable in German Stock Exchange and German Stock Markets are weak form efficient. Arbitrage portfolios’ returns are not statistically significant at any level and many of the formed arbitrage portfolios earn negative returns in stead of positive ones. Further analysis of Technology stocks and Traditional stocks in a sub sample environment does not reveal any abnormal returns that are, in terms of short-term overreaction, statistically significantly higher for the Technology stocks as it was originally hypothesized.
Research data includes logarithmic return series of those stocks that are listed in Prime All Share Index and the market return is proxied by the return of the Prime All Share Index. The methodology of the thesis is similar to that of Lo and MacKinlay (1990) and Jegadees and Titman (1993). In addition to market wide analysis, stocks are examined in a sub sample environment in order to uncover possible differences in overreaction between the two industry classes.
According to the results contrarian strategy of buying prior losers and short-selling prior winners is not profitable in German Stock Exchange and German Stock Markets are weak form efficient. Arbitrage portfolios’ returns are not statistically significant at any level and many of the formed arbitrage portfolios earn negative returns in stead of positive ones. Further analysis of Technology stocks and Traditional stocks in a sub sample environment does not reveal any abnormal returns that are, in terms of short-term overreaction, statistically significantly higher for the Technology stocks as it was originally hypothesized.