DO MALAYSIAN INVESTORS’ JUDGEMENT EXHIBIT REFERENCE DEPENDENCE ?
Toh Guat Guan
Kolej Tunku Abdul Rahman
and
Zamri Ahmad
Universiti Sains Malaysia
ABSTRACT
The pleasure of obtaining gains and the pain of making losses is a powerful motivating factor that determining the trading behaviour of investors. The evaluation of gains and losses is dependent on the reference point. The purpose of this research is fourfold. Firstly, we would like to investigate whether daily extreme price change catch the attention of investors. Secondly, we then determine whether investors’ judgement exhibits reference dependence. Thirdly, we would like to investigate whether the attention-based strategy could provide temporary profit-making opportunity to investors. Finally, we evaluate the impact of reference point on the stock values. We find evidence that investors are not only attention-driven but their judgement displays reference dependence. The attention-based strategy does not generate positive abnormal returns except for strategy of buying portfolios consisting of loser-stocks. Moreover, the portfolios whose current price rises above (or falls below) its 52-week high (or 52-week low) at the date of formulation, tend to underperform (or outperform) in the subsequent period.
Keywords: Prospect Theory, Efficient Market Hypothesis, Attention Hypothesis, Reference Point, Reference Dependence, Attention-based Strategy
