Do Malaysian Investors' Judgement Exhibit Reference Dependence?

Abstract

The pleasure of obtaining gains and the pain of incurring losses is a powerful motivating factor 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 investigate whether daily extreme price changes catch the attention of investors. Secondly, we determine whether investors' judgement exhibits reference dependence. Thirdly, we investigate whether an attention-based strategy could provide temporary profit-making opportunity to investors. Finally, we evaluate the impact of the reference point on the stock values. We find evidence not only that investors are attention-driven, but also that 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.