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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Journal of Financial Economics 12 June The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. 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. 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.
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. The present empiricaltests are to our knowledgethe first attempt to use a behavioralprinciple to predict a new market anomaly.
Thus, if many investorschoose to wait longer than six months before realizinglosses, the portfolio of small firms may still contain many “losers.
This study of marketefficiencyinvestigateswhethersuch behavioraffects stock prices. This result may be due to his particular definition of the tax-loss selling measure.
Does the Stock Market Overreact?
Therefore, the empirical analysis is based on three types of return residuals: The Implicationsof Stock Return Seasonality. Harcourt Brace Jovanovich, reprintof the edition.
thhaler There is no risk adjustmentexcept for movements of the market as a whole and the adjustment is identical for all stocks. The bias can be seen by comparingthe CAPM-betasof the extreme portfolios. Does the stock market overreact? About the same time, Williams noted in this Theory of Investment Valuethat “priceshave been based too much on current earning power and too little on long-term dividend paying power” [28, p.
Werner De Bondt – Wikipedia
The problem is particularlysevere with respect to the winner portfolio. One class,of tasks which have a well-established norm are probability revision problemsfor which Bayes’ rule prescribesthe correctreactionto new information. Adds and drops of anal Since, for any period t, the same constant market return Rlmt subtracted from all Rjt’s, the results are interpretablein terms of is raw dollar returns.
The Theoryof Investment Value. The system can’t perform the operation now. An easy way to generate more less extreme observations is to lengthen shorten the portfolio formationperiod;alternatively, for any given formation period say, 1958 yearswe may compare the test period performance of less versus more hhaler portfolios, e.
Get my own profile Cited by View all All Since Citations h-index 96 78 iindex To repeat, our goal is to test whether the overreactionhypothesis is predictive.
While we are highly sensitive to these issues, we do not have the space to address them here. For, even if we knew the “correct” model of Em Rjt IFm it would explain only small part of the variation l1in Pit.
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.
Every Decemberbetween andwinner and loser portfolios are formed on the basis of residual return behaviorover the previous five years. The overreactioneffect deserves attention because it represents a behavioralprinciple that may apply in many other contexts. Implicationsfor OtherEmpirical Work The results of this study have interesting implications for previous work on the small firm effect, the January effect and the dividend yield and PIE effects.
With respect to the PIE effect, our results support the price-ratio hypothesis whereas low discussed in the introduction,i. This study was undertakento investigate the possibility that these phenomena are related by more than just appearance. 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.
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. Articles 1—20 Show more. First, the overreaction effect is asymmetric;it is much larger for losers than for winners.
Denondt 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. Their findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear. In particular,it counters the predictablecritiquethat the overreactioneffect may be mostly a small-firm phenomenon. Length of Formation 0.
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