Academic journal article Management : Journal of Contemporary Management Issues

Large Share Price Movements, Reasons and Market Reaction/velike Promjene U Cijeni Dionica, Razlozi I Reakcije Trzista

Academic journal article Management : Journal of Contemporary Management Issues

Large Share Price Movements, Reasons and Market Reaction/velike Promjene U Cijeni Dionica, Razlozi I Reakcije Trzista

Article excerpt

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1. INTRODUCTION

In turbulent transition times many stock markets experience sharp falls and rises in security prices. The reasons of and reaction to such changes should generate renewed interest in the price behavior of security markets in the transition countries. According to the well-known efficient market hypothesis, introduced by Fama (1965), "stock prices at any time fully reflect all available information" (as cited by McKenzie, 2008, p. 206). It means that stock prices are unpredictable and that only rational asset pricing models can determined the expected stock returns. The evidence on the stock market and empirical studies showed that the stock prices are not unpredictable and that stock prices do not always reflect all available information. The opposite view of the stock market philosophy represented by Keynes (1936) is that the investor is not rational and is guided by short-run speculative motives. Investors are more interested in the speculative trading and short-run movements then in assessing the present value of future dividends and holding an investment for a significant period. The postulates of the efficient market hypothesis are that investors have a long-term perspective and they make rational calculation of the return on investment based on changes in the long-run income flows. Investors are interested in short-term gains and thus have very short-term planning horizons (Crotty, 1990).

Over the years, several inconsistencies with popular asset pricing models, the so called market anomalies, emerged. Lee et al., (2002) notes that in market fluctuations the events themselves are not so important, as the human reactions to those events. Bloomfield et al., (1991) explains that financial markets underreact to information in some cases or market price does not move upward far enough in reaction to good news, or does not move downward far enough in reaction to bad news, while they may overreact in other situations. In order to understand the inherent dynamics of financial markets Malliaris and Stein (1999) raised the following question: "If price changes are induced by changes in information, can information concerning the shocks in fundamental factors explain the magnitude of the observed price volatility?" Or there are other factors that can explain the variance of price changes. Cutler et al., (1989) in his research as well wonder if the information is the cause of market anomalies, then how is possible to reach excess returns with little or no news. Franke and Sethi (1998 p.2) argue "that trajectories can easily exhibit complex dynamics, independently of any arrival of news".

If stock prices systematically overshot, then their reversals should be predictable from past return data alone, with no use of any accounting data such as earnings (Debondt and Thaler, 1985). Debondt and Thaler, (1985) in their research in experimental psychology, found that "most people overreact to unexpected and dramatic news". Motivated by this, Debondt and Thaler (1985) suggested two hypotheses to be tested: "(1) Extreme movements in stock prices will be followed by subsequent price movements in the opposite direction, and (2) The more extreme the initial price movement, the greater will be the subsequent adjustment with the goal to test if the overreaction hypotheses is predictive". These empirical tests are the first attempt to use behavioral principle to predict new market anomaly.

Further empirical research in different markets can shed more light on the literature on overreaction. The emerging capital markets in transition countries have a short history. Macedonian capital market belongs to the newly created markets in transition countries. The purpose of the article is:

1. To define and detect large price movements on Macedonian stock market within the period 2005-2009.

2. To find out the reason of these movements and whether they are information accompanied? …

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