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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To reiterate, the previous findings are broadlyconsistent with the predictions of the overreactionhypothesis. People seem to make predictions according to a simple matching rule: The Journal of Finance, Vol. 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.
Improving decisions about health, wealth, and happiness TC Leonard Constitutional Political Economy 19 4, 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 to asset pricing theory.
Our own findings raise new questions with respect to this hypothesis. New articles by this author. From a different viewpoint, therefore, the results in Table I are likely to underestimate both the true magnitudeand statistical significance of the overreactioneffect. Section II describes the results. Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January.
There is also considerable evidence that the actual expectations of professionalsecurity analysts and economic forecastersdisplay the same overreactionbias for a review, see De Bondt . And in again,in the third and fourthJanuaries? Finally, in surprisingagreementwith Benjamin Graham’s claim, the overreactionphenomenon mostly occurs during the second and third year of the test period.
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. Ohlson and Penman  have further suggestedthat the increasedvolatility of security returns following stock splits may also be linked to overreaction.
First, if in early January selling pressure disappears and prices “rebound”to equilibriumlevels, why does the loser portfolio-even while it outperformsthe market-“rebound” once again in the second January of the test period? This study of marketefficiencyinvestigateswhethersuch behavioraffects stock prices. This systematic bias may be responsible for the earlier observed asymmetryin the return behavior of the extreme portfolios.
We will focus on stocks that have experiencedeither extreme capital gains or extreme losses over periods up to five thlaer. We use information technology and tools to increase productivity and facilitate new forms of scholarship.
EconPapers: Does the Stock Market Overreact?
Similar proceduresapply for the residuals of the loser portfolio. Stock and the Futures Figure 1 shows the movement of the ACAR’s as we progress through the test period. The term overreaction carries with it an implicit comparison to some degree of reaction that is consideredto be appropriate. An alternative behavioral explanation for the anomaly based on investor hypothesis e. On each of the 16 relevant portfolio formation dates DecemberDecemberThe PIE ratio is presumed to be a proxy for some omitted factor which, if included in the “correct”equilibrium valuation model, taler eliminate the anomaly.
For every stockj on the tape with at least 85 months of returndata months 1 through 85without any missing values in between, and starting in January month 49the next 72 monthly residualreturns ujt months 49 through are estimated. Email address for updates. Length of the Formation Period and No. Combiningthe results with Kleidon’s  findings that stock price movements are strongly correlatedwith the following year’s earnings changes suggests a clear pattern of overreaction.
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Please contact the publisher regarding any further use of this work. Winner portfolios, on the other hand, earn about 5. The step is repeated 16 times denondt all nonoverlappingthreeyear periods between January and December The results in Figure 3 have some of the properties of a “trading rule.
Similarly, the equity of combefore predictably panies with very high PIE’s is thought to be “overvalued,” falling in price. But all three experiments are clearly affected by the same underlyingseasonal pattern. The choice of the data base, the CRSP Monthly Return File, is in part justified by 4Since this study concentrateson companiesthat experienceextraordinary returns,either positive or negative, there may be some concern that their attrition rate sufficiently deviates from the “normal” so as to cause a survivorship rate bias.