The influence of price limits on overreaction in emerging markets: Evidence from the Egyptian stock market

• I investigate the impact of different price limits regime on the overreaction hypothesis.
• I find evidence of the overreaction hypothesis in the Egyptian Stock Exchange.
• Price reversal pattern is observed 1–3 days post limit hits.
• The results support the directional effect and the magnitude effect hypotheses.
• The volatility spillover hypothesis is a possible interpretation to the results.

The main objective of this paper is to investigate the influence of price limits on the overreaction hypothesis in the Egyptian Stock Exchange (EGX) during the period 1999–2010. I find evidence of the overreaction anomaly in the EGX within different price limit regimes. Price reversal is observed two and three days post lower and upper limit hits respectively within the strict price limits regime. However, it occurs after one day only for both lower and upper limit hits within the circuit breakers regime. These results support the directional effect hypothesis as large stock price movements are followed by price reversals in the opposite direction. Moreover, the results support the magnitude effect hypothesis as the larger the initial price movements the greater the subsequent reversals.