A Re Examination of the Over-Reaction Hypothesis in the Equity Market: Australian Evidence 1980 to 1997

Curtin University School of Economics & Finance Working Paper No. 06:2000

21 Pages Posted: 6 May 2003

See all articles by Benjamin Donovon

Benjamin Donovon

Curtin University - Department of Finance and Banking

John P. Evans

Curtin University - Centre for Research in Applied Economics

John L. Simpson

Curtin University - Centre for Research in Applied Economics

Date Written: June 2000

Abstract

The inconclusive nature of the over-reaction hypothesis, combined with an inherent difficulty in isolating specific determinants, has meant that the controversy surrounding this model has been perpetuated within the financial economics literature. It is the objective of this study to examine whether over-reaction is present in the Australian stock market over the period 1980-1997. The results from this study raise new questions about the relevance of the over-reaction hypothesis to the Australian market. The over-reaction hypothesis suggests that if investors over-react then a contrarian strategy of buying losers and selling winners, should earn significant abnormal returns. The results in our study show that winners experience a reversal and losers continue to be losers. Further, this study extends the current literature by examining reversal behaviour at an aggregate industry level and disaggregated sector level. Evidence is found of sector reversal that is time varying. No evidence is found to support persistent over-reaction.

Keywords: Over-reaction hypothesis, Contrarian, Reversal Behaviour, Risk Premia

JEL Classification: G140

Suggested Citation

Donovon, Benjamin and Evans, John Philip and Simpson, John L., A Re Examination of the Over-Reaction Hypothesis in the Equity Market: Australian Evidence 1980 to 1997 (June 2000). Curtin University School of Economics & Finance Working Paper No. 06:2000, Available at SSRN: https://ssrn.com/abstract=385401 or http://dx.doi.org/10.2139/ssrn.385401

Benjamin Donovon

Curtin University - Department of Finance and Banking

Hayman Road
Bentley 6102 WA
Australia
08 92663081 (Phone)
08 92663026 (Fax)

John Philip Evans

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

John L. Simpson (Contact Author)

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

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