The Usage of Market's Overreaction Effect for Extraction of Abnormal Returns

This paper is devoted to overreaction effect in conditions of Russian market. This paper investigates whether the effect exists and whether it is possible to extract abnormal returns basing trading strategies on it. An industry effect regarding overreaction effect and accompany of insider trading are tested also. All hypotheses are tested for positive and negative price shocks separately. The sample includes 649 shocks by 38 firms from 2012 to 2017 on MICEX. Event-study approach and regression analysis are applied to run data analysis. The results show that although overreaction was found on short term positive shocks sample, it was impossible to get statistically significant abnormal return of it. The backward effect (underreaction) was found for companies of industry of consumer goods in the long term (up to 20 days after the shock). It is also interesting that even though overreaction was not found for a sample of negative shocks, abnormal returns could be extracted in accordance of effect’s logic. It was also shown that price shocks were accompanied by features of insider trading (1 day before positive shocks and 1-2 days before negative movements).