DEBONDT AND THALER 1985 PDF

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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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. An easy way to generate more less extreme observations is to lengthen shorten the portfolio formationperiod;alternatively, for any given formation period say, two yearswe may compare the test period performance of less versus more extreme portfolios, e.

The Journal of Finance, Vol. Does the Stock Market However, the companies in the extreme portfolios do not systematically differ with respect to market capitalization.

The outstanding feature of Figure 3 is, once again, the January returns on the loser portfolio.

The effect of multiplying the numberof replications is anc remove part of the random noise. JSTOR’s Terms and Conditions of 195 provides, in 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.

The measure is related to the securities’ relative price movementsover the last six monthspriorto portfolioformationonly.

First, the overreaction effect is asymmetric;it is much larger for losers than for winners. To repeat, our goal is to test whether the overreactionhypothesis is predictive.

Werner De Bondt

Please contact the publisher regarding any further use of this work. Figure 3 shows the ACAR’s for an experiment with a five-year-longtest period. While we are highly sensitive to these thalfr, we do not have the space to address them here. As long as the variation in Em R? Winner portfolios, on the other hand, earn about 5. A commonprocedureis to estimate the parametersof the market model see e. Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January.

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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. For, even if we knew the “correct” model of Em Rjt IFm it would explain only small part of the variation l1in Pit. One of the earliest observations about overreactionin markets was made by J. We begin devondt describing briefly the individual and market behavior that piqued our interest. Length of the Formation Period and No.

If so, the price movementsof other assets-such as land or housing-should match those of stocks.

This observation is in agreement with the naive version of the tax-loss selling hypothesis as explained by, e. A third hypothesis, advocated by Marsh and Merton [19], is that Shiller’sfindingsare a result of his misspecificationof the dividendprocess.

EconPapers: Does the Stock Market Overreact?

A Test of the Efficient MarketHypothesis. Consistent with the overreaction hypothesis, evidence of weak-form market inefficiency is found. The financial support of the C. Of course, unless these omitted factors can be identified, the hypothesis is untestable. Finally, in surprisingagreementwith Benjamin Graham’s claim, the overreactionphenomenon mostly occurs during the second and third year of the test period.

Every Decemberbetween andwinner and loser portfolios are formed on the basis of residual return behaviorover the previous five years. In order to check whether the choice affects the results, some of the empirical tests use May as the portfolio formation month. The effect is observed as late as five Januaries after portfolio formation! 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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We will now describe the basic 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.

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! If no such quote is availablebecause the stockholdersreceive nothing for their shares, the return is entered as minus one. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon debodt wide range of content in a trusted digital archive.

Twelve months into the test period, the difference in performancebetween the extreme portfolios is a mere 5. The bias can be seen by comparingthe CAPM-betasof the extreme portfolios. And in again,in the third and fourthJanuaries? The New Contrarian Investment Strategy.

Thus, if many investorschoose to wait longer than six months thaper realizinglosses, the portfolio of small firms may still contain many “losers.

Over the last half-century, loser portfolios of 35 stocks outperformthe market by, on average, From a different viewpoint, therefore, the results in Table I are likely to underestimate both the true magnitudeand statistical significance of the overreactioneffect.

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.

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.

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