De Bondt, W. F. M., & Thaler, R. H. (). Does the stock market overreact. Journal of finance, 40, DeBondt, W.F. and Thaler, R. () Does the Stock Market Overreact The Journal of Finance, 40, Werner F M De Bondt and Richard Thaler · Journal of Finance, , vol. link: :bla:jfinan:vyip

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The measure is related to the securities’ relative price movementsover the last six monthspriorto portfolioformationonly. In other words, “winner” W and “loser” portfolios L are formed conditional upon past excess returns, rather than some firm-generatedinformationalvariable such as earnings. There is also considerable evidence that the actual expectations of professionalsecurity analysts and economic forecastersdisplay the same overreactionbias for a review, see De Bondt [7].

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

In order to estimate the relevant residuals, debomdt equilibrium model must be specified. Instead, we will concentrate on an empiricaltest of the overreaction hypothesis.

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Consistent with the overreaction hypothesis, evidence of weak-form market inefficiency is found. Once future earnings turn out to be better than the unreasonablygloomy forecasts, the price adjusts. Ohlson and Penman [20] have further suggestedthat the increasedvolatility of security returns following stock splits may also be linked to overreaction. We will focus on stocks that tjaler experiencedeither extreme capital gains or extreme losses over periods up to five years.

One method thalerr allows us to further accentuate the strength of the January effect is to increase the number of replications. Thus, if many investorschoose to wait longer than 1895 months before realizinglosses, the portfolio of small firms may still contain many “losers. The Dehondt Investment Value. 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 the accompanying t-statistics.


If stock prices systematically overshoot, then their reversal should be predictable from past return data alone, with no use of any accounting data such as earnings. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. This systematic bias may be responsible for the earlier observed asymmetryin the return behavior of the extreme portfolios. The step is repeated 16 times for all nonoverlappingthreeyear periods between January and December If a security’s return is missing in a month subsequentto portfolio formation,then, from that moment on, the stock is permanently droppedfrom the portfolio and the CAR is an average of the availableresidualreturns.

In particular,it counters the predictablecritiquethat the overreactioneffect may be mostly hhaler small-firm phenomenon. First, the overreaction effect is asymmetric;it is much thaper for losers than for winners.

Differencesin CumulativeAverageResidualBetween Winner and Loser Portfolios of 35 Stocks formedover the previousone, two, or three years; months into the test period 1. In spite of the observedtrendiness of dividends, investors seem to attach disproportionate importanceto short-run economic developments. The question then arises whether such behavior matters at the market level. Section II describes the results.

With respect to the PIE effect, our results support the price-ratio hypothesis whereas low discussed in the introduction,i. 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.

Both hypotheses imply a violation of weak-form market efficiency.

If so, the price movementsof other assets-such as land or housing-should match those of stocks. They are consistent with the overreaction hypothesis. Therefore,no statistical tests are performed.

Several aspects of the results remain without adequate explanation; most importantly,the large positive excess returns earned by the loser portfolio every January. The New Contrarian Investment Strategy. The findings have other notable aspects. In order to judge whether, for any month t, the average residual return makes a contribution to either A CAR or ACARL,t, we can test whether it w,t is significantly different from zero.


De Bondt [7] formally derives the econometric biases in the estimated marketadjusted and market model residuals if the “true”model is multifactor, e.

Werner De Bondt – Wikipedia

1895 Conclusions Research in experimental psychology has suggested that, in violation of Bayes’ rule, most people “overreact”to unexpected and dramatic news events. If trading continues, the last return ends with the last listed price. Therefore,we will only report the results based on market-adjusted excess returns. This study was undertakento investigate the possibility that these phenomena are related by more than just appearance.

More recently, Arrowhas concludedthat the work of Kahneman and Tversky “typifies very precisely the exessive reaction to current information which seems to characterize all the securities and futures markets” [1, p. Harcourt Brace Jovanovich, reprintof the edition. Relevant t-statistics can be found thalet each of the 36 postformation months but they do not represent independent evidence.

De Bondt and Thaler,Does the Stock Market Overreact_百度文库

As long as the variation in Em R? Persistently, losers earn exceptionally large January returns while winners do not. Combiningthe results with Kleidon’s [18] findings that stock price movements are strongly correlatedwith the following year’s earnings changes suggests a clear pattern of overreaction.

Similar proceduresapply for the residuals of the loser portfolio. Empirical Tests The anc testing proceduresare a variant on a design originally proposed by Beaver and Landsman [5] in a different context.

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