Exuberance, Unchecked Manipulations, and the Behavior of Reversals in Emerging Market Economies

Abstract

The primary objective of this study is to examine stock market manipulations, particularly pump-and-dump schemes, in South Asian emerging markets (India, Pakistan, and Bangladesh). This study makes a novel contribution by investigating the performance of the contrarian investment strategy during the crash periods of pump-and-dump manipulations. Using Supremum Augmented Dickey-Fuller (SADF) and Generalized Supremum Augmented Dickey-Fuller (GSADF) tests, the analysis identifies the occurrence and duration of these manipulations, confirming that they induce artificial price surges followed by sharp crashes. A key finding reveals that the contrarian investment approach, which involves betting against prevailing market trends, consistently generates superior returns during crash phases. Furthermore, the study demonstrates that the profitability of contrarian strategies is influenced by short-term return reversals of winning portfolios during market crashes, providing a profitable opportunity for investors under manipulating conditions. These findings are critical for investors and regulators, highlighting the risks of uninformed trading amidst manipulations and suggesting protective investment strategies. JEL Classification: G12; G14; G15