Published Paper Details:

The behaviour of investors has an important role in determining the movement of stock prices. Traditional financial theories assume that investors make rational decisions and that market prices quickly reflect available information. However, actual market behaviour often shows that investors do not always respond to information in a rational manner. Two important behavioural patterns associated with this issue are overreaction and underreaction. Overreaction occurs when investors respond too strongly to new information, while underreaction refers to a delayed or insufficient response. Overreaction occurs when investors respond too strongly to new information. This can push stock prices away from their actual value and may lead to a later fall in prices. Underreaction is different. It occurs when investors respond slowly to new information, which may allow the price movement to continue for some time. This study examines evidence of overreaction and underreaction in selected Indian stocks of Sensex using a winner-loser portfolio approach. Weekly closing prices of 15 selected companies are used for the analysis. The five companies with the highest cumulative abnormal returns (CAR) are classified as winners, while the five companies with the lowest CAR are classified as losers. The BSE Sensex is used as the market benchmark. Abnormal returns are calculated using the market-adjusted return method. Average abnormal return (AAR) and cumulative average abnormal return (CAAR) are then used to examine the performance of the winner and loser portfolios. Five formation and testing periods are considered. These periods cover short, medium and long-term horizons. One-sample t-tests, paired-sample t-tests and Wilcoxon signed-rank tests are used to examine the significance of the results. The findings show mixed evidence. Negative Winner-Loser CAARs are found in three of the five testing periods. This shows that past winners performed worse than past losers in these periods and provides some evidence of overreaction. The strongest reversal is found in the medium-term period, with a Winner-Loser CAAR of -5.6658%. However, positive CAARs are found in the long-term period and one short-term period. These results suggest continuation and are consistent with possible underreaction. The findings therefore suggest that investor behaviour varies across investment horizons. The evidence of reversal and continuation indicates that both overreaction and underreaction may occur in the Indian stock market, but their presence is not consistent across all periods.