A Study of Overreaction Hypothesis in the Indian Equity Market

The purpose of this study is to examine the overreaction hypothesis in the Indian stock market during the period 1990 to 2012. It also explores whether this overreaction hypothesis is the manifestation of earlier anomalies such as size effect and value effect. The stock price and fundamental data of 1,427 Indian firms listed on the Bombay Stock Exchange during the period 1990 to 2012 have been used. Time series regression and CAPM have been applied to test overreaction, size and value effects. The empirical results suggest that past losers have a tendency to outperform past winners for longer investment periods such as two to three years. Although lower in magnitude, yet this superior performance of loser stocks is economically significant in the Indian equity market. The empirical results do not reveal any calendar anomaly in the superior performance of loser stocks. Furthermore, the results indicate that losers tended to be small and value stocks and that the limited overreaction effects documented are ...