IS OVERREACTION A MARKET MICROSTRUCTURE ISSUE OR A COMMON HUMAN BEHAVIOR? DIVING INTO NEW TERRITORIES

Starting with De Bondt and Thaler's seminal work in 1985, the stock market overreaction phenomenon has been thoroughly studied throughout developed markets.De Bondt and Thaler (1985) presented evidence that proved the existence of overreaction in response to particular market events in the US market, which causes stock prices to drift off from their fundamental values such that "Winners" become "Losers" and vice versa.The overwhelming majority of research has always focused on developed stock markets, and very limited literature exists on the presence of the overreaction effect in emerging markets.This study utilizes monthly stock returns sourced from Datastream to investigate the presence of the overreaction hypothesis in geographically proximate yet distinct MENA region countries, including Turkey and Pakistan.The research indicates that the overreaction hypothesis is valid during a specific timeframe, specifically from the 20th to the 60th month of the testing period.Stocks display substantial behavioral continuation for up to 20 months after the formation of portfolios, as initially observed.Thus, the role reversal between "Winners" and "Losers" takes longer in the selected sample period of 2000-2023.A second reversal is observed around the 60-month mark, where formation losers return to underperforming winners.Moreover, January seasonality, firm size, leverage, and equity beta offer little explanation for market overreaction, underscoring the significance of non-Bayesian psychological factors in investor decision-making.