Analysis of Investor Overreaction Effect and Random Walk: A Case Study of Pakistan Stock Exchange

Shafiq Ur Rehman, Bahrawar Said


Research in behavioral finance put forward that in violation of Bayes’ theorem rule and involving in Noise trading, majority of the investors in stock market tend to underreact or overreact to unanticipated bad and good news. One of the investor anomalies “Overreaction effect” in 30 firms listed in Pakistan Stock Exchange has been investigated in this study with the help of the portfolios of Loser and Winner Average Cumulative Abnormal Return’s. Moreover, the Random Walk is checked over the average prices of the same 30 firms listed in Pakistan stock market. This research of market efficiency took stocks data of randomly selected 30 firms listed in Pakistan Stock Exchange on weekly basis whether such investor’s anomalies affect stock prices. The result presents that there exist weak form of efficiency where the investor Overreaction present over many periods especially in global financial crises. Along with it, the Econometric test confirms the presence of Random Walk in the thirty firms of Pakistan stock market. Finally, the portfolios of loser Average Cumulative Abnormal Return’s outperformed that of portfolios of winner Average Cumulative Abnormal Return’s.


Underreaction, Overreaction, Loser and Winner Average Cumulative Abnormal Returns (ACAR’s), Pakistan Stock Exchange (PSE).

Full Text:



Alexander, S. S. (1961). Price movements in speculative markets: Trends or random walks. Industrial Management Review (pre-1986), 2(2), 7-19.

Ali, R., Ahmad, Z., & Anusakumar, S. V. (2011). Stock market overreaction and trading volume: evidence from Malaysia. Asian Academy of Management Journal of Accounting & Finance, 7(2), 103-119.

Auer, B. R., & Schuster, M. (2011). Does the financial crisis influence the random walk behaviour of international stock markets? Applied Economics Letters, 18(4), 319-323

Benou, G., & Richie, N. (2003). The reversal of large stock price declines: The case of large firms. Journal of Economics and Finance, 27(1), 19-38.

Bond, D., & Dyson, K. A. (2008). Long memory and nonlinearity in stock markets. Applied Financial Economics Letters, 4(1), 45-48.

Cardano, G. Liber De LudoAleae (1564). The title is translated as:‘Book on Games of Chance.

DeBondt, W. F., & Thaler, R. (1985). Does the stock-market overreact? Journal of finance, 40(3), 793-805.

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417.

Gao, Y., & Oler, D. (2012). Rumors and pre-announcement trading: why sell target stocks before acquisition announcements? Review of Quantitative Finance and Accounting, 39(4), 485-508.

Hoitash, R., & Krishnan, M. M. (2008). Herding, momentum and investor over-reaction. Review of Quantitative Finance and Accounting, 30(1), 25-47.

Karan, M. B., & Kapusuzoglu, A. (2010). An Analysis of the Random Walk and Overreaction Hypotheses Through Optimum Portfolios Constructed by the Nonlinear Programming Model. Australian Journal of Basic and Applied Sciences, 4(6), 1215-1221.

Ludwig, A., & Zimper, A. (2013). A decision-theoretic model of asset-price underreaction and overreaction to dividend news. Annals of Finance, 9(4), 625-665.

Lunde, A., &Timmermann, A. (2004). Duration dependence in stock prices: An analysis of bull and bear markets. Journal of Business & Economic Statistics, 22(3), 253-273.

Maheshwari, S., & Dhankar, R. S. (2014). A Critique of Overreaction Effect in the Global Stock Markets Over the Past Three Decades. IOSR Journal of Business and Management, 16(4), 25-32.

Mehmood, M. S., Mehmood, A., & Mujtaba, B. G. (2012). Stock Market Prices Follow the Random Walks: Evidence from the Efficiency of Karachi Stock Exchange. European Journal of Economics, Finance and Administrative Sciences, 51(1), 71-80.

Regnault, J. (1863). Calcul des chances et philosophie de la bourse. Mallet-Bachelier.

Ryoo, H. J., & Smith, G. (2002). Korean stock prices under price limits: Variance ratio tests of random walks. Applied Financial Economics, 12(8), 545-553.

Schaub, M., Song Lee, B., &Eae Chun, S. (2008). Overreaction and seasonality in Asian stock indices: Evidence from Korea, Hong Kong and Japan. Research in Finance, 7(3), 169-195.

Schöler, L., Skiera, B., & Tellis, G. J. (2014). Stock Market Returns to Financial Innovations Before and During the Financial Crisis in the United States and Europe. Journal of Production Innovation Management, 31(5), 973-986.

Sewell, M. (2011). History of the Efficient Market Hypothesis. RN, 11(04), 1-14.

Sohail, A., & Javid, A. Y. (2014). The Global Financial Crisis and Investors' Behaviour: Evidence from the Karachi Stock Exchange (No. 2014: 106). Pakistan Institute of Development Economics.

Soomro, R. H., Ahmed, S. F., & Hussain, A. (2016). Contrarian Strategy after Testing Overreaction Hypothesis in Cement Sector Companies Listed in Karachi Stock Exchange. Journal of Advanced Management Science, 4(3), 1-16.

Wiggenhorn, J., & Madura, J. (2005). Impact of liquidity and information on the mispricing of newly public firms. Journal of Economics and Finance, 29(2), 203-220.

Worthington, A. C., & Higgs, H. (2009). Efficiency in the Australian stock market, 1875–2006: a note on extreme long-run random walk behaviour. Applied Economics Letters, 16(3), 301-306.

Wang, J., Burton, B. M., & Power, D. M. (2004). Analysis of the overreaction effect in the Chinese stock market. Applied Economics Letters, 11(7), 437-442.



  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
Sarhad Journal of Management Sciences by Sarhad University of Science & Information Technology is licensed under a Creative Commons Attribution 4.0 International License.
Based on a work at