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Overreaction Effect in Nordic Stock Markets: A Quantitative Analysis of a Contrarian Investment Strategy

Klungland, Martin Hansen; Klokk, Peter Sollie
Master thesis
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Preliminary Master Thesis.pdf (556.2Kb)
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http://hdl.handle.net/11250/2579692
Issue date
2018
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  • Master of Science [835]
Abstract
Research in behavioral finance suggests that investors are prone to violate Bayes’

theorem and thus irrationally conform to various heuristics. This challenges the

Efficient Market Hypothesis and is reflected in the stock market through

overreactions and subsequent price reversals. Our thesis investigates whether

such overreactions are affecting stock prices in four Nordic stock markets and

sectors, and if such overreactions can be theoretically exploited through a

contrarian strategy; selling portfolios of prior winner stocks whilst

simultaneously buying portfolios of loser stocks. We also address critique

targeted at the Overreaction Hypothesis, such as the January effect. The

empirical proof from the Nordics is consistent with what the Overreaction

Hypothesis predicts; statistically significant stock price reversals are predictable

both on market- and sector level, exclusively based on historical return data,

suggesting a significant weak-form market inefficiency.

Keywords: Overreaction Hypothesis, Market Efficiency, Behavioral Finance,

Heuristics, Irrationality, Experimental Psychology.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2018
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Handelshøyskolen BI

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