Investors Reaction to Market Surprises on the Indian Stock Exchange and Currency Markets

Yaman O. Erzurumlu, Richard A. Ajayi

Abstract


This paper examines the reaction of investors to the arrival of unexpected information on the Indian equity and foreign exchange markets. Market surprises are identified using a strictly quantitative approach, and cumulative abnormal returns are calculated and tracked for a period of 30 days after each favorable or unfavorable event.

The empirical results provide evidence that the reactions of investors following unexpected bad news on the Mumbai Stock Exchange (MSE) and the rupee-dollar exchange market are consistent with Uncertain Information Hypothesis (UIH).This means that following a major unfavorable event, security prices are initially set below their fundamental values while subsequent clarifications of the uncertainty results in positive price movements to their equilibrium levels. The results indicate that reactions on the MSE for unexpected good news are mostly positive but modestly significant while reactions on the FOREX following positive surprises are barely positive and not statistically significant. The overall results for both markets are therefore consistent with the UIH but stronger and statistically significant in the case of negative market surprises.

A possible implication of this study for investors is that employing an investment strategy of buying losers in both markets following a sharp decline may generate superior returns.


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DOI: http://dx.doi.org/10.5296/ajfa.v6i1.5441

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