Tehran Stock Exchange Underreaction Following Extreme Market Events

Document Type : Research Paper


1 M.Sc., Department of Financial Engineering, Faculty of Financial Sciences, Kharazmi University, Tehran, Iran.

2 Assistant Prof., Department of Financial Management and Financial Engineering, Faculty of Financial Sciences, Kharazmi University, Tehran, Iran.


Objective: The purpose of this study is to investigate the presence of under-reaction or over-reaction in Tehran Stock Exchange after extreme market events. Regarding the vast number of these events, finding how investors trade in these conditions is crucial for timely decision making and portfolio management. Regulations also can be wisely made to control investors.
Methods: Using daily TEDPIX and daily prices of all stocks from 2009 – 2018, we identify extreme market events by comparing daily market returns with the 500- days moving Value at Risk (VaR) of returns. Winner and loser portfolios are formed in the second stage and Then, we investigate the presence or absence of under-reaction or over-reaction by comparing momentum and reversal strategies' excess return. Positive values of momentum strategy excess returns lead us to under-reaction and positive values of reversal strategy lead us to an over-reaction.
Results: According to the results from the present study, from 67 extreme events in the research period, we have 30 positive and 37 negative extreme events. The momentum strategy yields a positive and significant excess return on average. Consequently, we find that stocks tend to under-react after both positive and negative events. But this behavior is more intense after negative events. Thus, the momentum strategy can make excess returns. Also, we didn't find the persistence of over-reaction within the study criteria.
Conclusion: Short-term under-reaction in the Tehran Stock Exchange may be due to the daily price limit of this market. Disregarding of the cause, investors can make a profit by taking advantage of the opportunity in the days following an extreme event. In other words, investors that prefer a momentum strategy can have notable excess returns in the days following an extreme event.


 Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307–343.
Bondt, W. F. and Thaler, R. (1985), Does the Stock Market Overreact? The Journal of Finance, 40: 793-805.
Boubaker, S. Farag, H. and Nguyen, D. (2015). Short-term overreaction to specific events: Evidence from an emerging market. Research in International Business and Finance, 35, 153-165.
Brown, Keith C., Harlow, W. V., & Tinic, Seha M. (1988). Risk aversion, uncertain information and market efficiency. Journal of Financial Economics, 22, 355–385.
Can Yalcin, K. (2010). Market Rationality: Efficient Market Hypothesis versus Market Anomalies. European Journal of Economic and Political Studies, 3, 23-38.
Corrado, Ch. & Jordan, B. D. (1997). Risk aversion, uncertain information, and market efficiency. Reexamining the evidence. Review of Quantitative Finance and Accounting, 8, 51–68.
Cox, D.R., & Peterson, D.R. (1994). Stocks returns following large one-day declines: Evidence on short-term reversals and longer-term performance. The Journal of Finance, 49(1), 255–267.
Eslami Bidgoli, Q., Talebi, A. (2010). Investigating the Impact of Factors Affecting Regular Shareholder Price Reaction on Tehran Stock Exchange. Daneshvar Raftar, 17 (44), 461-476. (in Persian (
Farag, H. (2015). The Influence of Price Limits on Overreaction in Emerging Markets: Evidence from the Egyptian Stock Market. Quarterly Review of Economics and Finance, 58, 190-199. http://dx.doi.org/10.1016/j.qref.2015.01.003
Faramarzi, Mehdi. (2013). Investigating Investors' Overreaction and the Impact of Investment Period on this phenomenon in Tehran Stock Exchange. M.Sc., Islamic Azad University, Merv Dasht. (in Persian)
Ghalibaf Asl, H. & Naderi, M. (2006). Investor Overreaction to Information in Boom and Recession Periods: The Case of Tehran Stock Exchang. Journal of Financial Research, 8(21), 97-112. (in Persian (
Golarzi, Gh. & Danayi, K. (2019). Evaluation of Shareholders’ Overreaction and its Comparison in Small and Large Companies (Case Study: Accepted Companies in Tehran Stock Exchange). Journal of Financial Management Perspective, 25, 59 – 76.
(in Persian(
Grigaliūnienė, Ž. (2011). Investor Sentiment, Overreaction and Underreaction in Stock Market. The 18th Annual Conference of the Multinational Finance Society, Italy.
Larson, S. & Madura, J. (2003). What Drives Stock Price Behavior Following Extreme One-Day Returns. The Journal of Financial Research, 26(1), 113-127.
Lerskullawat, P. & Ungphakorn, T. (2018). Does overreaction still exist in Thailand? Kasetsart Journal of Social Sciences, 1-6. DOI: 10.1016/j.kjss.2018.02.001
Liang, Y. & Mullineaux, D. J. (1994). Overreaction and reverse anticipation: two related puzzles? The Journal of Financial Research, 17(1), 31–43.
Madadi, S., Barzgar, N., Mousavi, M. (2014). Overreaction modeling of Stock Market through Intraday OHLC Prices. Empirical Research in Accounting, 3(4), 179-196. (in Persian (
Mahani, R.S. and Poteshman, A. M. (2008). Overreaction to stock market news and misevaluation of stock prices by unsophisticated investors: Evidence from the option market. Journal of Empirical Finance, 15, 635–655.
Maher, D. & Parikh, A. (2011). Short-term under/overreaction, anticipation or uncertainty avoidance? Evidence from India. Journal of International Financial Markets. Institutions and Money, 21(4), 560-584.
Miralles-Marcelo, J., Miralles-Quiros, J., &Miralles-Quiros, M. (2014). Intraday Stock Market Behavior after Shocks: The Importance of Bull and Bear Markets in Spain. Journal of Behavioral Finance, 15(2), 144-159.
Mun, J. C., Vasconcellos, G. M. and Kish, R. (2000). The Contrarian/Overreaction Hypothesis an analysis of the US and Canadian stock markets. Global Finance Journal, 11 (1-2) 53–72.
Murray, Z. F. and Sanati, A. (2018), How does the stock market absorb shocks? Journal of Financial Economics, 129(1), 136-153.
Najafi, A.A., Nopour, K. and Ghatarani, A. (2017). Interval Optimization in Portfolio Selection with Conditional Value at Risk. Journal of Financial Research, 19(1), 157-172.
(in Persian (
Nikbakht, M., Moradi, M. (2005). The Evaluation Investors Overreaction in the Tehran Stock Exchange (TSE). Empirical Studies in Financial Accounting, 3(9), 1-26. (in Persian (
Parikakis, G. & Syriopoulos, T. (2008). Contrarian strategy and overreaction in foreign exchange markets. Research in International Business and Finance, 22(3), 319-324.
Piccoli, P., Chaudhury, M., Souza, A. and da Silva, W. (2017). Stock overreaction to extreme market events. Research in International Business and Finance, 42, 275-284.
Rostami Noroozabad, M., Jalilvand, A., Fallahshams Layalestani, M. & Saeedi, A. (2019). What Factors Influence the Differential Behavior of Value and Growth Firms? Evidence from the Tehran Stock Exchange. Financial Research Journal, 21(4), 517-544.
Saeida Ardakani, S., Bahlakeh, A., Mirzad, N. & Tavassoly, T. (2015). A review of investors’ reaction to unexpected events in Tehran Stock Exchange. Journal of Financial Research, 17(1), 103-122. (in Persian (
Salehi Sadaghiani, J. (2007). Determining investment risk in an exchange portfolio by using Value at Risk (VaR) method. Industrial Management Studies, 6(17), 183-200.
(in Persian(
Schnusenberg, O. and Madura, J. (2001). Do U.S. Stock Market Indexes Over- or Under-React? Journal of Financial Research, 24(2), pp.179-204.
Shahiki Tash, M. N., Esmail Ezazi, M., Bimorgh, L. (2013) Computation Value at Risk in Tehran Stock Market. Economic Development Research, 3 (10), 51-70. (in Persian (
So, M. & Yu, P. (2006). Empirical analysis of GARCH models in value at risk estimation, Journal of International Financial Markets. Institutions and Money, 16(2), 180-197.
Spyrou, S., Kassimatis, K., & Galariotis, E. (2007). Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange. Applied Financial Economics, 17(3), 221-235.
Teigen, K. H., & Keren, G. (2003). Surprises: low probabilities or high contrasts? Cognition, 87, 55–71.
Vakilifard, H., Saeedi, A., Eftekhari, A. (2013). Behavioral Reactions An Analysis Based on the Data Derived from the Tehran Stock Exchange. Financial Management Strategy, 1(2), 33-52. (in Persian (
Zarowin, P. (1990), Size, Seasonality, and Stock Market Overreaction. Journal of Financial and Quantitative Analysis, 25(1), 113-125.