Does overreaction still exist in Thailand?

Abstract

Overreaction of stock prices is identified when investors give more credence to new information than its intrinsic value, thus driving stock prices away from the level at which they should be. This study aims to examine the overreaction hypothesis in Thailand in recent years, with the intention of suggesting investment strategies based on the results obtained. The final sample of 438 companies was collected from the period 1990 to 2016 and is categorised into two portfolios: loser portfolios, with the lowest past returns; and winner portfolios, with the highest past returns. Both equally-weighted and valueweighted methods are used to examine these two portfolios. The results show evidence of stock price overreaction on the Thai stock market, particularly during periods involving interesting situations, such as the Asian financial crisis of 1997, political chaos in 2005, and the global financial crisis in 2008-2009. Moreover, the contrarian strategy is preferred when investing in Thailand, as the loser portfolios reveal a reversed performance in the following period. However, when the value-weighted method is applied, evidence of overreaction is stronger. This indicates that larger stocks appear to overreact more in comparison to smaller ones. Thus, the size effect should be an interesting point to consider prior to making investment decisions in Thailand.