Template-Type: ReDIF-Article 1.0

Author-Name: Klaudia Radoczy
Author-Workplace-Name: University of Pécs
Author-Email: radoczy.klaudia@ktk.pte.hu

Author-Name: Akos Toth-Pajor
Author-Workplace-Name: University of Pécs
Author-Email: toth-pajor.akos@ktk.pte.hu


Title: Investors' Reactions to Extreme Events in the Hungarian Stock Market

Abstract: This paper examines investors' reactions to extreme events in the Hungarian stock
market. We seek to answer the research question whether following extreme events
any overreaction of investors can be observed on the Budapest Stock Exchange.
With a view to answering the research question, we identify extreme events based
on extreme returns on the market portfolio and then - using an event study - we
examine abnormal returns on winner and loser equities. After examining investors'
reactions, we inspect the performance of the contrarian strategy in the created
event windows. The main result of our research is the presentation that - based on
the analysis of the differences between the average cumulative abnormal returns
after extreme events - investor overreactions can be observed in the Hungarian
stock market. The loser portfolios relating to extreme events significantly outperform
winner portfolios connected to the event. The excess return of the contrarian
strategy cannot be attributed to differences in the market risk of winner and loser
portfolios. The excess return of the strategy can be shown only under tighter extreme
value thresholds. The clustering of the event windows with short-term reversal,
high market volatility and extreme events is beneficial to the performance of the
contrarian strategy. In addition, our research also shows that the purchase of loser
portfolios or the development of a contrarian strategy after extreme events may
generate profit for investors, since after extreme events the loser portfolios usually
beat the market on a horizon of 21 days.

Classification-JEL: G11, G12, G14
Keywords: extreme events, event study, overreaction, contrarian strategy
Pages: 5-30
Volume: 20
Issue: 3
Year: 2021
File-URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-20-3-st1-radoczy-toth-pajor.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:20:y:2021:i:3:p:5-30