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The Persistence of Investor Overreaction on the JSE
(2012-12-04) Brand, Rian
Since the 1980s, behavioural finance has chipped away at the efficient market hypothesis by pointing out several anomalies, such as market overreaction. The efficient market hypothesis predicts that once an anomaly has been identified, the markets will arbitrage it away. The question asked is whether the effect of market overreaction has reduced as the market took note of this anomaly. Using market data from the JSE, it was tested to ascertain whether the effect of the market overreaction has reduced over time and if this anomaly also fluctuates over time. It was found that the arbitrage opportunity presented by market overreaction fluctuates with market cycles and that the effect of overreaction has diminished over time. Although market overreaction can still be used in the South African equity market to generate outperformance, the market has arbitraged out much of the advantage that could be gained from exploiting it.