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Prior Return Effect in Indian Stock Market: An Intra-day Analysis

International Journal of Financial Management

Volume 5 Issue 1

Published: 2015
Author(s) Name: Vanita Tripathi, Shalini Aggarwal | Author(s) Affiliation:
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Abstract

In a first of this kind, this paper examines the issue of prior return effect in Indian stock market in intra-day analysis using high frequency data. We document that in Indian stock market, security returns exhibit a reversal in their direction within few minutes of extreme price rises as well as price falls. However the speed with which the correction takes place is slightly different for good news events and bad news events. Indian investors tend to be optimistic as they immediately bring stock prices up following unjustified price falls but take time to bring stock prices down following unjustified price rises. These findings lend a further support to short-term overreaction literature. More importantly, these findings serve as a proof of predictability of the direction of future stock prices and consequent returns on an intra-day basis. It forwards important investment implications for traders, fund managers, and investors at large.

Keywords: Prior Return Effect, Contrarian Strategy, Overreaction Effect, Overreaction Hypothesis, Indian Stock Market, Intraday Analysis, High Frequency Data

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