Working Paper: PART I: Tests of the Overreaction Hypothesis on the JSE in the Post Millennium ERA

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Working Paper PART I Tests of the
Overreaction Hypothesis on the JSE in the Post
Millennium ERA

• Presenters
• Kathleen Hodnett, M.Com (Finance), RPE
• Finance Lecturer UCT
• Andy Hsieh, M.Com (Finance), CFA, RPE
• Finance Senior Lecturer UWC

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Overreaction Hypothesis

• Investors overbought past winners, and oversold
  past losers
• Implications
• past winners become losers, and past losers
  become winners!

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Methodology based on De Bondt and Thaler (1985,
1987)

• Past winner and loser portfolios are formed based
  on past return momentum (cumulative returns)
• Overlapping portfolio formation dates on January,
  April, July and October of 2001, 2002, 2003, 2004
  and January 2005.
• Post formation performance evaluated based on
  cumulative average residuals (CAR) above or below
  ALSI.

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Summary

• Overreaction Hypothesis holds on JSE
• Mean reversion takes place for MOM48 and MOM60
  contrarian strategy works!
• (MOM60 Loser gt MOM48 Loser)
• Momentum strategy works and build up bubble from
  MOM6, MOM12, MOM24 and MOM36!
• (MOM6 Winner gt MOM12 Winner gt MOM24 Winner gt
  MOM36 Winner)