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Survey of European Firms. Financial Management - Essay Example
Author : kozeymaggie
Pages 3 (753 words)
However there is a vast amount of: literature that provides evidence to the opposite direction. More specifically, the literature has documented profits for Contrarian and Momentum strategies that have been attributed to investor overreaction and under reaction, respectively.
Survey of European Firms. Financial Management
They go on to elaborate that they two strategies are very connected to each other, thus insinuating that one could not be affected by investors reactions without the other being affected also.
There is some evidence to support the fact that profits have nothing to do with investor over (or under) reaction. In light of the massive amounts of evidence that speaks otherwise, I find myself unconvinced that a market that lives a breathes because of the activity of the investors will be unaffected by their whims. Oumar and Kodjovi (2003) find that there is most certainly a parallel between the stocks that do well and the state of mind possessed by those buying them. They say that someone who has been a recent loser in the stock market will tend to be a bit cautious until they find a new hot investment. Once they come across something that looks promising they will, because of a sense of inflated optimism and hope, buy more than they normally would. Someone who has been a consistent winner, on the other hand, will typically encourage within himself to grow a particular sense of apprehension and reserve. What are the end results of these two separate mentalities trading together on the market floor A bit of a confusing result to say the least. The market will reflect the optimism and pervasiveness of the investor who knows that he will bounce back. It will also reflect the introverted spending habits of someone who knows that the next big financial disaster is just around the corner. ...