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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 ยท Journal of Finance, , vol. link: :bla:jfinan:vyip

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Similar proceduresapply for the residuals of the loser portfolio. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis.

Finally, in surprisingagreementwith Benjamin Graham’s claim, the overreactionphenomenon mostly occurs during the second and third year of the test period.

The present empiricaltests are to our knowledgethe first attempt to use a behavioralprinciple to predict a new market anomaly.

As time goes on and new securities appear on the tape, more and more stocks qualify for this step. Winner portfolios, on the other hand, earn about 5.

The PIE ratio is presumed to be a proxy for some omitted factor which, if included in the “correct”equilibrium valuation model, would eliminate the anomaly. And in again,in the third and 1895

Does the Stock Market Overreact?

The requirementthat 85 subsequent returns are available before any firm is allowed in the sample biases the selection towards large, established firms. JSTOR’s Terms and Conditions of Use provides, ddbondt part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use.

As the cumulative average residuals during the formation period debpndt 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.

In order to check whether the choice affects the results, some of the empirical tests use May as the portfolio formation month. Thus, if many investorschoose to wait longer than six months before realizinglosses, the portfolio of small firms may still contain many “losers.


Our own findings raise new questions with respect to this hypothesis.

EconPapers: Does the Stock Market Overreact?

The effect is debnodt as late as five Januaries after portfolio formation! Empirical Tests The empirical testing proceduresare a variant on a design originally proposed by Beaver and Landsman [5] in a different context. An equally weighted arithmetic average rate of return on all CRSP listed securities serves as the market index. One method that allows us to further accentuate the strength of the January effect is to increase the number of replications.

Does the Stock Market Overreact? For example, investor overreactionpossibly explains Shiller’s earlier [26] findings that when long-term interest rates are high relative to short rates, they tend to move down later on.

Werner De Bondt – Wikipedia

We use information technology and tools to increase productivity and facilitate new forms of scholarship. One class,of tasks which have a well-established norm are probability revision problemsfor which Bayes’ rule prescribesthe correctreactionto new information. The formation month for these portfolios is the month of Decemher rebondt all uneven years hetween and The bias can be seen by comparingthe CAPM-betasof the extreme portfolios.

Several aspects of thalsr results remain without adequate explanation; most importantly,the large positive excess returns earned by the loser portfolio every January. When a security is delisted, suspendedor halted, CRSP determineswhether or not it is possible to trade at the last listed price. Adds and drops of anal Figure 3 shows the ACAR’s for an experiment with a five-year-longtest period. Thus, the loser portfolios not only outperformthe winnerportfolios;if the CAPM is correct, they are also significantly less risky.

They conclude that the existence of some rational agents is not sufficient to guarantee a rational expectations equilibrium in an economy with some of what they call quasi-rationalagents.

First, dbeondt 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? 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 debond whether it w,t is significantly different from zero.


Throughoutthe test period, the difference in ACAR for the experiment with a three-year formation period the upper curve exceeds the same statistic for the experiments based on two- and one-year formationperiods middle and lower curves.

Werner De Bondt

Dbeondt contact information may be obtained at http: Harcourt Brace Jovanovich, reprintof the edition. 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! Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January.

Therefore,no statistical tests are performed. However, this is not actually observed. The paper ends with a brief summaryof conclusions. The Journal of Finance, Vol. Cambridge University Press, Clearly,the successive 46 yearly selections are not independent.

With respect to the PIE effect, our results support the price-ratio hypothesis whereas low discussed debobdt the introduction,i. As long as the variation in Em R?

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. As shown in-De Bondt [7], the use of market-adjusted excess returns has deondt further advantage that it is likely to bias the research thaleg against the overreaction hypothesis.

Their findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear. The question then arises whether such behavior matters at the market level. In other words, “winner” W and “loser” portfolios L are formed conditional upon past excess returns, rather than some firm-generatedinformationalvariable such as earnings.