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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As long as the variation in Em R?
Much to our surprise, the effect is observed as late as five years after portfolio formation. The overreaction hypothesis predicts that, as we focus on stocks that go throughmore or less extreme return experiences duringthe formationperiodthe subsequentprice reversalswill be more or less pronounced.
We begin by describing briefly the individual and market behavior that piqued our interest. The next section describes the actual empirical tests we have performed. Title Cited by Year Nudge: In spite of the observedtrendiness of dividends, investors seem to attach disproportionate importanceto short-run economic developments. Since, for any period t, the same constant market return Rlmt subtracted from all Rjt’s, the results are interpretablein terms of is raw dollar returns.
The procedure is repeated 16 times starting in JanuaryJanuaryThe effect of multiplying the numberof replications is eebondt remove part of the random noise. The question then arises whether such behavior matters at the market level.
Consistent with the overreaction hypothesis, evidence of weak-form market inefficiency is found. As the cumulative average residuals during the formation period for various sets of winner and loser portfolios grow larger, so do the subsequent price reversals, measured by [ACARL,t – ACARw,] and debondy accompanying t-statistics.
Russell and Thaler  addressthis issue. Therefore,no statistical tests are performed. To repeat, our goal is to test whether the overreactionhypothesis is predictive.
Does the Stock Market Overreact?
The excess volatility issue has been investigated most thoroughly by Shiller . Most importantly,the extraordinarilylarge positive excess returns earned by the loser portfolio in January. This observation is in agreement with the naive version of the tax-loss selling hypothesis as explained by, e.
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 effect is observed as late as five Januaries after portfolio formation! Journal of Financial Economics 12 June From a different viewpoint, therefore, the results in Table I are likely to underestimate both the true magnitudeand statistical significance of the overreactioneffect.
A third hypothesis, advocated by Marsh and Merton , is that Shiller’sfindingsare a result of his misspecificationof the dividendprocess.
Their findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear. Every Decemberbetween andwinner and loser portfolios are formed on the basis of residual return behaviorover the previous five years. Cambridge University Press, The January phenomenon is usually explained by tax-loss selling see, e. The measure is related to the securities’ relative price movementsover the last six monthspriorto portfolioformationonly. Finally, in surprisingagreementwith Benjamin Graham’s claim, the overreactionphenomenon mostly occurs during the second and third year of the test period.
But all three experiments are clearly affected by the same underlyingseasonal pattern. But, if the effect under study can be shown to debonndt to them, the results are, if anything, more interesting. The overreactioneffect deserves attention because it represents a behavioralprinciple that may apply in many other contexts.
However, several aspects of the results remain without adequateexplanation. Once future earnings turn out to be better than the unreasonablygloomy forecasts, the price adjusts. The New Contrarian Investment Strategy. Ball  emphasizes the effects of omitted risk factors. We discuss the implications for other empirical work on asset pricing anomalies. 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.
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.
This rule-of-thumb,an instance of what Kahneman and Tversky call the representativeness heuristic, violates the basic statistical principal that the extremeness of predictions must be moderatedby considerationsof predictability.
De Bondt and Thaler,Does the Stock Market Overreact_百度文库
Of course, unless these omitted hhaler can be identified, the hypothesis is untestable. Thus, whenevera stock dropsout, the calculations involve an implicit rebalancing. 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.
Fairness as a constraint on profit seeking: They include, among others, the “bid-ask” effect and the consequences of infrequenttrading.
EconPapers: Does the Stock Market Overreact?
Articles 1—20 Show more. Does the stock market overreact? Empirical Tests The empirical testing proceduresare a variant on a design originally proposed by Beaver and Landsman  in a different context. This study of marketefficiencyinvestigateswhethersuch behavioraffects stock prices. Figure 1 shows the movement of the ACAR’s as we progress through the test period. We will now describe the debondh research design used to form the winner and loser portfolios and the statistical test proceduresthat determine which of the two competing hypotheses receives more support from the data.
This systematic bias may be responsible for the earlier observed asymmetryin the return behavior of the extreme portfolios.