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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Does the Stock Market Overreact?
Articles 1—20 Show more. As shown in-De Bondt , the use of market-adjusted excess returns has the further advantage that it is likely to bias the research design against the overreaction hypothesis.
Careful examination of Figure 3 also reveals a tendency, on the part of the loser portfolio, to decline in value relativeto the market between October and December. And in again,in the third and fourthJanuaries?
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Both hypotheses imply a violation of weak-form market efficiency. Consistent with the overreaction hypothesis, evidence of weak-form market inefficiency is found.
There is also considerable evidence that the actual expectations of professionalsecurity analysts and economic forecastersdisplay the same overreactionbias for a review, see De Bondt . Finally, the choice of December as the “portfolio formation month” and, therefore, of January as the “starting month” is essentially arbitrary. New articles by this author. The step is repeated 16 times for all nonoverlappingthreeyear periods between January and December Differencesin CumulativeAverageResidualBetween Winner and Loser Portfolios of 35 Stocks formedover the previousone, two, or three years; months into the test period 1.
Similar proceduresapply debpndt the residuals of the loser portfolio. We discuss the implications for other empirical work on asset pricing anomalies.
EconPapers: Does the Stock Market Overreact?
Specifically, two hypotheses are suggested: Most importantly,the extraordinarilylarge positive excess returns earned by the loser portfolio in January. If no trade is possible, CRSP tries to find a subsequentquote and uses it to computea returnfor the last period.
Stock and the Futures My profile My library Metrics Alerts. Their findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear.
Once future earnings turn out to be better than the unreasonablygloomy forecasts, the price adjusts.
Richard Thaler – Google Scholar Citations
What 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? The decision to study the CAR’s for a period of 36 months after the portfolio formation date reflects a compromise between statistical and economic considerations, namely, an adequatenumberof independent replications versus a time period long enough to study issues relevant thqler asset pricing theory.
This systematic bias may be responsible for the earlier observed asymmetryin the return behavior of the extreme portfolios. Grether  has replicatedthis finding under incentive compatible conditions. Possible answers to these questions include the argument that investors may wait for years before realizing losses, and the observedseasonality of the market as a whole.
If no such quote is availablebecause the stockholdersreceive thalee for their shares, the return is entered as minus one. Title Cited by Year Nudge: The outstanding feature of Figure 3 is, once again, the January returns on the loser portfolio. The effect of multiplying the numberof replications is to remove part of the random noise.
About the same time, Williams noted in this Theory of Investment Valuethat “priceshave been based too much on current earning power and too little on long-term dividend paying power” [28, p.
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The following debondg are merged in Scholar. We begin by describing briefly the individual and market behavior that piqued our interest. Much to our surprise, the effect is observed as late as five years after portfolio formation. This result may be due to his particular definition of the tax-loss selling measure.