Behavioral finance as a school of economics and investigation of momentum and contrast strategies in Borsa Istanbul stock market during crisis periods

In this study, the applications and methods of behavioral finance, which derives its theoretical foundations from behavioral economics, were examined. Throughout economic history, understanding market functioning has always been a need and a matter of curiosity. So much so that all currents of economic thought are built on this subject. This process first started with Adam Smith's "Invisible Hand" theory and continued with classical economics, neo-classical economics, keynesian economics, etc. It was continued by the traditional (orthodox) economics of which it is a part. However, the failure to predict global crises that affected international trade and even the world economy, such as the Great Depression of 1929 and the Oil Crisis of 1973, and the failure to find solutions to their consequences significantly reduced the confidence in traditional economics. Behavioral economics emerged at this point, as a part of heterodox economics that integrated economics with sociology and psychology, and brought attention to the individual for the first time. While doing this, it resorted to experiment and observation. Studies in behavioral economics have shown that herd psychology; the need for approval and appreciation; repeating mistakes; A person, who often acts purely rationally, such as an intuitive approach to decisions, and sometimes with unconscious factors, can neither have full knowledge nor analyze the information he has correctly, due to these aspects. Therefore, human beings are not mechanical, contrary to their depiction in traditional economics; It is irrational. In the method used, unlike traditional economics, it is not mathematical models based on deduction; The principle of embedding economics in society was used. Behavioral economics is the only field that comprehensively addresses human behavior for the first time. Behavioral finance examined this through financial markets for the first time. In behavioral finance, the impact of human behavior on financial markets is examined in two ways. The first of these is various prejudices and cognitive errors that are closely related to the science of psychology. The second is market anomalies. In our study, we focused on market anomalies. Accordingly, the investor either overreacts or underreacts to new information. In case of overreaction, stocks that have made gains in the past will start to lose in the future, and stocks that have lost in the past will start to make gains in the future. In case of low reaction, stocks that have made gains in the past will continue to make gains in the future, and stocks that have made losses in the past will continue to make losses in the future. Therefore, the expected return is predictable based on historical data. In this context, the weak form of market efficiency of the efficient markets hypothesis is also neglected. In financial markets, where overreaction and underreaction can be tested on a hypothesis basis, two strategies determine the direction of the investment position. Accordingly, in case of overreaction, the contrast strategy should be applied. This strategy involves disposing of stocks that have earned money in the past; It will provide above-market returns by including stocks that have lost in the past into the portfolio. In case of low response, momentum strategy should be applied. This strategy is to hold stocks that have yielded returns in the past; It will provide above-market returns by disposing of stocks that have lost money in the past. However, the correction of the anomaly in price movements takes at most 60 months in case of overreaction; In case of low response, it will start within a maximum of 12 months. In this study, 172 stocks that were traded continuously between January 2005 and June 2022 within the BIST 100 index were examined in terms of crisis periods. These crisis periods are; It has been determined as the 2018 global economic crisis, the 2018 economic crisis caused by the floating exchange rate regime and finally the Covid-19 period. Winning and losing portfolios were first created according to a 12-month holding-test period, then a 24-month holding-test period. Afterwards, in order to complete the lack of momentum analysis in the literature, portfolios were reconstructed according to 3-6-9 month test periods. The results show that a momentum effect was observed for up to 12 months in all crisis periods except the Covid period. During the Covid period, overreaction was observed only in the 3-month test period following the portfolio creation period. On the other hand, in the results obtained according to the 24-month analysis periods, a momentum effect was detected in all crisis periods.