INVESTOR OVERREACTION ON THE HONG KONG AND FRANKFURT STOCK EXCHANGES

Abstract

The ability to successfully exploit the presence of investor overreaction has been identified in a number of stock exchanges, yet numerous examples exist where little or un-exploitable investor overreaction is found. This research attempts to identify an international market where a) useful investor overreaction exists, and b) relatively strong currency performance adds further returns. From a list of 17 potential stock exchanges in developed and semi-developed markets, 2 bourses were selected for detailed evaluation –namely the Hong Kong and Frankfurt Stock Exchanges. Twelve years of historical data were used to determine the extent of out-performance possible. Advances on previous research include the use of filtering techniques to exclude high risk shares, the quantification of volatility when investing in “loser” portfolios, and the determination of risk adjusted out-performance. While significant, risk-adjusted out-performance was verified in the Stock Exchange of Hong Kong, no significant overreaction was found on the Frankfurt Stock Exchange.