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Contrarian Strategy after Testing Overreaction Hypothesis in Cement Sector Companies Listed in Karachi Stock Exchange

Riaz H. Soomro 1, Syed Faizan Ahmed2, and Amjad Hussain 3
1. Hamdard University, Karachi, Pakistan
2. Hamdard Institute of Management Sciences, Hamdard University, Karachi, Pakistan
3. DHA Suffa University, Karachi, Pakistan

Abstract—The proposition that stock markets are efficient is expected to prevail in every stock exchange. It means that existing stock prices are determined with the help of complete information available. The unnatural changes in stock prices are basically due to biasness in human nature. Investors tend to overreact strongly to extreme news. Stock prices in the beginning of extremely bad news fall below their justified equilibrium price in the market and extremely good news has the reversal impact on the stock prices. This study investigates the overreaction hypothesis in the listed companies of Cement sector of KSE listed companies. Data for this empirical work is collected from the period January 2001 to December 2012. The data relates to the unadjusted stock prices of five cement companies. The secondary data is collected from AKD securities portfolios. The stocks selected for the study are those which have the complete data of the prices. This study assumes that current stock prices of the cement sector of the company are efficient. The study found evidence of existence of overreaction in stocks of cement sector as it is the case for all developing and developed countries stocks markets. However almost all the stated all the overreactions were statistically insignificant without eleventh and twelfth months. According to study the contrarian strategy may be adopted by the investors in the eleventh month. It is recommended that such studies may be conducted on the overall stocks of KSE 100 Index to give us the idea of the existence of the overreaction in the Market.

Index Terms—overreaction hypothesis, winner stocks, loser stocks, Karachi stock exchange, contrarian strategy, cement sector

Cite: Riaz H. Soomro, Syed Faizan Ahmed, and Amjad Hussain, "Contrarian Strategy after Testing Overreaction Hypothesis in Cement Sector Companies Listed in Karachi Stock Exchange," Journal of Advanced Management Science, Vol. 4, No. 3, pp. 250-254, May 2016. doi: 10.12720/joams.4.3.250-254
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