De Bondt, W. F. M., & Thaler, R. H. (). Does the stock market overreact. Journal of finance, 40, Werner F M De Bondt and Richard Thaler · Journal of Finance, , vol. link: :bla:jfinan:vyip Behavioral finance theorists Werner De Bondt and Richard Thaler released a study in the Journal of Finance called “Does the Market Overreact?” In their .

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Stock and the Futures Instead, we will tbaler on an empiricaltest of the overreaction hypothesis. It has now been well-established that Bayes’ rule is not an apt characterization of how individuals actually respond to new data Kahneman et al.

A commonprocedureis to estimate the parametersof the market model see e. Both classes of behavior can be characterizedas displaying overreaction.

Consistent with the predictions of the overreaction hypothesis, portfolios of prior “losers”, found to outperformprior “winners. Debpndt 3 shows the ACAR’s for an experiment with a five-year-longtest period.

The resultsalso Portfolios and shed new light on the Januaryreturnsearnedby prior”winners” “losers.

Fairness as a constraint on profit seeking: To repeat, our goal is to test whether the overreactionhypothesis is predictive. Explanations are usually based on alleged misspecificationof the capital asset pricing model CAPM.


Richard Thaler – Google Scholar Citations

Russell and Thaler [24] addressthis issue. My profile My library Metrics Alerts. There ‘ Of course,the variabilityof stock prices may also reflect changes in real interest rates.

Reinganum [21] has claimed that the small firm effect subsumes the PIE effect and that both are related to the same set of missing and againunknown factors. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, debontd build upon a wide range of content in a trusted digital archive.

Does the Stock Market Overreact?

Thwler are the equilibria conditions for marketsin which some agents are not rational in the sense that they fail to revise their expectations accordingto Bayes’ rule? But all three experiments are clearly affected by the same underlyingseasonal pattern. What will happen if the equilibriummodel is misspecified? This study was undertakento investigate the possibility that these phenomena are related by more than just appearance.

The system can’t perform the operation now. Journal of Debodnt Economics 12 June In other words, “winner” W and “loser” portfolios L are formed conditional upon past excess returns, rather than some firm-generatedinformationalvariable such as earnings. Persistently, losers earn exceptionally large January returns while winners do not.

Werner De Bondt

Journal of PortfolioManagement10 Winter If no such quote is availablebecause the stockholdersreceive nothing for their shares, the return is entered as minus one. For a formation period as short as one year, no reversal is observed at all. The paper ends with a brief summaryof conclusions.


Figure 1 shows the movement of the ACAR’s as we progress through the test period. Much to our surprise, the effect is observed as late as five years after portfolio formation. The bias can be seen by comparingthe CAPM-betasof the extreme portfolios. If so, the price movementsof other assets-such as land or housing-should match those of stocks.

Werner De Bondt – Wikipedia

The PIE ratio is presumed to be a proxy for some omitted factor which, if included in the “correct”equilibrium valuation model, would eliminate the anomaly. Please contact the publisher regarding any further use of this thqler.

Cumulative Average Residuals for Winner and Loser Portfolios of 35 Stocks months into the test period While not reported here, the results using market model and Sharpe-Lintner residualsare similar.