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Critical Analysis of the Implication of Overreaction to the Return Predictability in Uk Stock Market

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Critical analysis of the implication of overreaction to the return predictability in UK stock market

Over the past decades, overreaction has drawn attention from many economic researchers, the most significant studies being Jegadeesh and Titman, (1993), De Bondt and Thaler (1985) proving the existence of overreaction. In their framework, they violated the EMH assumption. Then many later studies examined the overreaction effect through different market anomalies with One of the important anomalies being arbitrage trading strategies.

This paper will follow the Jegadeesh and Titman, (1993) framework and the Hons and Tonks (2002) method to construct a momentum strategy for UK market with winner and loser portfolio. The aim of this …show more content…

Third, review and examine the impact of different investment strategies to generate abnormal return and to find out the return predictability of the overreaction in UK market.

The evidences from the finding should be able to provide an advice for both existing and potential investors in UK stock market.

1.3 Structure layout of research.

Chapter 1 Introduction to research

Illustrate the research aim and outline the research objective

Chapter 2 Literature Review

Critically review previous literature to develop a fundamental knowledge of overreaction and it anomalies.

Chapter 3 Methodology

Demonstrating how momentum strategy is formed based on previous literature and how serial correlation is used to predict future return

Chapter 4 Data Analysis

Interpretation of result, compare and contrast the result with previous literature

Chapter 5 Conclusion.

Outlines the limitation of research and further suggestions

Chapter 2 Literature Review

2.1 Overreaction Hypothesis

Overreaction is one of the pricing behaviours in the security market. In order to understand the mechanism of this pricing behaviour, it is useful to understand the impact of influencing factor to the security price change. Efficient market

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