The Global Financial Crisis and Investors’ Behaviour: Evidence from the Karachi Stock Exchange

2014:106

The present study empirically examines the short term under and overreaction effect in the Karachi Stock Exchange, Pakistan, in the context of the 2008 Global Financial Crisis considering the period from September 2007 to 2009. This crisis has been considered as the largest and most severe financial event since the Great Depression. The study findings reveal a consistent pattern in relation to prior studies on the subject, reflecting absence of any prominent evidence of short term under or overreaction effect in the case of Karachi Stock Exchange both during and after the financial crisis events. The evidence implies that the stocks that displayed a large price increase (winners portfolio) did not display any significant evidence of overreaction atleast for the first four weeks following the crisis news specifically for the financial sector. While the stocks that displayed large price decline (losers portfolio) did not reveal any kind of significant under or overreaction. The abnormal returns differential overall indicates significant but disproportionate levels of overreaction in the first two weeks and later on underreaction is observed in the financial sector in the short run highlighting the returns reversal for the two portfolios. On the other hand, both the winner and loser portfolios individually do not provide any indication of either under or overreaction. However, the abnormal returns differential signifies some level of underreaction which is insignificant in nature. Thus, the return reversals are particularly pronounced only in case of the financial sector as an after math of the global financial crisis indicating presence of a diminished degree of both under and overreaction after the crisis which may be attributable to the performance persistence behaviour of investors i.e. the momentum effect and the limited international financial market linkages that averted the contagion impact of the subprime financial crisis of 2008.