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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Several aspects of the results remain without adequate explanation; most tahler large positive excess returns earned by the loser portfolio every January. North-Holland, reprint of edition.

Finally, the choice of December as the “portfolio formation month” and, therefore, of January as the “starting month” is essentially arbitrary. Improving decisions about health, wealth, and happiness TC Leonard Constitutional Political Economy 19 4, Journal of Financial Economics 12 June Consistent with the predictions of the overreaction hypothesis, portfolios of prior “losers”, found to outperformprior “winners.

To repeat, our goal is to test whether the overreactionhypothesis is predictive. 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. My profile My library Metrics Alerts. However, since all three methods are single-index models that follow denondt the CAPM, misspecification problems may still confound the results.

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 following articles are merged in Scholar. Most financial economists seem to regardthe anomaly as a statistical artifact. The paper ends with a brief summaryof conclusions.

Specifically, two hypotheses are suggested: Their findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear. From a different viewpoint, therefore, the results in Table I are likely to underestimate both the true magnitudeand statistical significance of the overreactioneffect. Most of the problems arise with the use of daily data, both with respect to the risk and return variables.

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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.

Gambling with the house money and trying to break even: In other words, “winner” W and “loser” portfolios L are formed conditional upon past excess returns, rather than some firm-generatedinformationalvariable such as earnings.

However, the companies in the extreme portfolios do not systematically differ with respect to market capitalization.

The winner portfolio, on the other hand, gains value at the end of the year and loses some in Debont for more details, see De Bondt [7]. If there were a persistent tendency for the portfolios to differ on dimensions that may proxy for “risk,” then, again, we cannot be sure whetherthe empiricalresults support market efficiency or market overreaction.

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On each of the 16 relevant portfolio formation dates DecemberDecemberWe use information technology and tools to increase productivity and facilitate new forms of scholarship. A Test of the Efficient MarketHypothesis. Does the Stock Market Deblndt commonprocedureis to estimate the parametersof the market model see e. We will focus on stocks that have experiencedeither extreme capital gains or extreme losses over periods up to five years.

Figure 3 shows the ACAR’s for an experiment with a five-year-longtest period. Both hypotheses imply a violation of weak-form market efficiency.

EconPapers: Does the Stock Market Overreact?

The findings have other notable aspects. Mental accounting and consumer choice R Thaler Marketing science 4 3, The bias can be seen by comparingthe CAPM-betasof the extreme portfolios.

Length of the Formation Period and No. Please contact the publisher regarding any further use of this work. Russell and Thaler [24] addressthis issue.

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Instead, we will concentrate on an empiricaltest of 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.

For all the experiments listed in Table I, the average betas of the securities in the winner portfolios are significantly larger than the betas of the loser portfolios. Therefore,we will only report the results based on market-adjusted excess returns.

Firms in the top thlaer stocks or the top 50 stocks, or the top decile are assigned to the winner portfolio W; firms in the bottom 35 stocks or the bottom 50 stocks, or the bottom decile to the loser portfolio L.

Does the Stock Market Overreact?

However,Basu [4] found a significant PIE effect after controlling for firm size, and earlier Graham [11] even found an effect within the thirty Dow Jones Industrials,hardly a group of small firms! The requirementthat 85 subsequent returns are available before any firm is allowed in the sample biases the selection towards large, established firms. 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.

Fairness as a constraint on profit seeking: Similar proceduresapply for the residuals of the loser portfolio. This “Cited by” count includes citations to the following articles in Scholar.

Fhaler statistical tests are performed. Finally, in surprisingagreementwith Benjamin Debondf claim, the overreactionphenomenon mostly occurs during the second and third debondg of the test period.