Market overreaction : understanding drivers of investor behaviour

Abstract

In this paper, we seek to determine if large price drops and subsequent price reversals are a result of market sentiment, industry-type and type of news while validating conventional literature on market overreaction. Our study provides further evidence to earlier studies by Ajayi and Mehdian (1994) and De Bondt and Thaler (1987) that markets do tend to overreact to negative news and we have found the aforementioned factors play a role in influencing investor behaviour, leading to market overreaction. Overall, these results provide strong support for the market overreaction hypothesis and shed light on new determinants that influence market overreaction.