Journal of Applied Finance & Banking

Testing Short-Term Over/Underreaction Hypothesis: Empirical Evidence from the Egyptian Exchange

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  • Abstract

    This paper investigates whether short-term over/underreaction appears in the Egyptian Exchange, over the period of January 1998 to December 2013, making this the first attempt to test this market anomaly in an Arab stock market. The analysis reveals that while short-term overreaction doesn’t exist in the Egyptian Exchange, there is statistically significant evidence of underreaction for the holding periods of one to four weeks. This under-reaction is found to be concentrated in large firms. Tests to establish whether this evidence of underreaction can be profitable, show that while a momentum strategy can provide significant abnormal returns of up to 0.885% over a holding period of four weeks, when trading costs are taken into account, the profitability of the momentum strategy becomes insignificant.