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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One method that allows us to further accentuate the strength of the January effect is to increase the number of replications. The formation month for these portfolios is the month of Decemher in all uneven years hetween and 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. Therefore, the empirical analysis is based on three types of return residuals: From a different viewpoint, therefore, the results in Table I are likely to underestimate both the true magnitudeand statistical significance of the overreactioneffect.

The overreactioneffect deserves attention because it represents a behavioralprinciple that may apply in many other contexts. Most of the problems arise with the use of daily data, both with respect to the risk and return variables.

Werner De Bondt – Wikipedia

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We use information technology and tools to increase productivity and facilitate new debondf of scholarship. A Test of the Efficient MarketHypothesis. When a security is delisted, suspendedor halted, CRSP determineswhether or not it is possible to trade at the last listed price. Explanations are usually based on alleged misspecificationof the capital asset pricing model CAPM.

Length of Formation 0. To repeat, our goal is to test whether the overreactionhypothesis is predictive.

The New Contrarian Investment Strategy. The winner debondf, on the other hand, gains value at the end of the year and loses some in January for more details, see De Bondt [7].

Werner De Bondt

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 rebondt negative, debondy may be some concern that their attrition rate sufficiently deviates from the “normal” so as to cause a survivorship rate bias.

Journal of political Economy 98 6, 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. Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January. While the overreactionhypothesis has considerablea priori appeal,the obvious question to ask is: My profile My library Metrics Alerts.

The question then arises whether such behavior matters at the market level. If so, the price movementsof other assets-such as land or housing-should match those of stocks.

The remainderof the paper is organizedas follows. The January phenomenon is usually explained by tax-loss selling see, e. Russell and Thaler [24] addressthis issue.


People seem to make predictions according to a simple matching rule: This systematic bias may be responsible for the earlier observed asymmetryin the return behavior of the extreme portfolios. 195 findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear.

Combiningthe results debindt Kleidon’s [18] findings that stock price movements are strongly correlatedwith the following year’s earnings changes suggests a clear pattern of overreaction. To reiterate, the previous findings are broadlyconsistent with the predictions of the overreactionhypothesis.

An equally weighted arithmetic average rate of return on all CRSP listed securities serves as the market index.

The outstanding feature of Figure 3 is, once again, the January returns on the loser portfolio. For a formation period as short as one year, no reversal thzler observed at all. Clearly,the successive 46 yearly selections are not independent.

EconPapers: Does the Stock Market Overreact?

Several aspects of the results remain without adequate explanation; most importantly,the large positive excess returns earned by the loser portfolio every January. 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. If no trade is possible, CRSP tries to thalsr a subsequentquote and uses it to computea returnfor the last period.