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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Publisher fhaler information may be obtained at http: 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. 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.
New citations to this author. However, for selected experiments,the portfolio formation and testing periods are one, two, and five years long. 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. Consistent with the overreaction hypothesis, evidence of weak-form market inefficiency is found.
EconPapers: Does the Stock Market Overreact?
Both classes of behavior can be characterizedas displaying overreaction. Cumulative Average Residuals for Winner and Loser Portfolios of 35 Stocks months into the test period While not reported here, the results using market 19855 and Sharpe-Lintner residualsare similar.
Does the Stock Market Overreact? If there were a persistent tendency for the portfolios to differ on dimensions that may drbondt for “risk,” then, again, we cannot be sure whetherthe empiricalresults support market efficiency or market overreaction.
In particular,it counters the predictablecritiquethat the overreactioneffect may be mostly a small-firm phenomenon. Much to our surprise, the effect is observed as late as five years after portfolio formation.
The question then arises whether such behavior matters at the market 1958. Of course, unless these omitted factors can be identified, the hypothesis is untestable.
De Bondt and Thaler,Does the Stock Market Overreact_百度文库
New articles by this author. The results in Figure 3 have some of the properties of a “trading rule. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Similarly, the equity of combefore predictably panies with very high PIE’s is thought to be “overvalued,” falling in price.
Gambling with the house money and trying to break even: The remainderof the paper is organizedas follows. 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. To repeat, our goal is to test whether the overreactionhypothesis is predictive. Instead, we will concentrate on an empiricaltest of the overreaction hypothesis.
As a final precaution, he also characterizes the securities in the extreme portfolios in terms of a number of financial variables.
Adds and drops of anal The financial support of the C.
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. Every Decemberbetween andwinner and loser portfolios are formed on the basis of residual return behaviorover the previous five years. The system can’t perform the operation now.
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For, even if we knew the “correct” model of Em Rjt IFm it would explain only small part of the variation l1in Pit. Ohlson and Penman  have further suggestedthat the increasedvolatility of security returns following stock splits may also be linked to overreaction. Section II describes the results. Discussion Several aspects of the research design deblndt some further comment. Firms in the top 35 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.
This drbondt instance of what Kahneman and Tversky call the representativeness heuristic, violates the basic statistical principal that the extremeness of thalef must be moderatedby considerationsof predictability. Clearly,the numberof independent replicationsvaries inversely with the length of the formationperiod. 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.
Combiningthe results with Kleidon’s  findings that stock price movements are strongly correlatedwith the following year’s earnings changes suggests a clear pattern of overreaction. One method that allows us to further accentuate the strength of the January effect is to increase the number of replications.
This “Cited by” count includes citations to the following articles in Scholar. A commonprocedureis to estimate the parametersof the market model see e.
Relevant t-statistics can be found for each of the 36 postformation months but they do not represent independent evidence. Over the last half-century, loser portfolios of 35 stocks outperformthe market by, on average, The requirementthat 85 subsequent returns are available before any firm is allowed in the sample biases the selection towards large, established firms. Russell and Thaler  addressthis issue. Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January.
Ball  emphasizes the effects of omitted risk factors.