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

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Werner De Bondt

In particular,it counters the predictablecritiquethat the overreactioneffect may be mostly a small-firm phenomenon. Discussion Several aspects of the research design deserve some further comment.

Conclusions Research in experimental psychology has suggested that, in violation of Bayes’ rule, most people “overreact”to unexpected and dramatic news events. At present, there is no evidence to support that claim, except for the persistent positive relationship between dividend yield a variable that is correlated with the PIE ratio and January excess returns Andd [15]. 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.

To reiterate, the previous findings are broadlyconsistent with the predictions of the overreactionhypothesis. Differencesin CumulativeAverageResidualBetween Winner and Loser Portfolios of 35 Stocks formedover the previousone, two, or three years; months into the test period 1. 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.

In spite of the observedtrendiness vebondt dividends, investors seem to attach disproportionate importanceto short-run economic developments.

The effect of multiplying the numberof replications is to remove part of the random noise. 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.

There ‘ Of course,the variabilityof stock prices may also reflect changes in real interest rates. Tjaler respect to the PIE effect, our results support the price-ratio hypothesis whereas low discussed in the introduction,i. Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January.


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. However, the companies in the extreme portfolios do not systematically differ with respect to market capitalization.

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. 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 deboondt the “normal” so as to cause a survivorship rate bias.

If no trade is possible, CRSP tries to find a subsequentquote and uses it to computea returnfor the last period. The excess volatility issue has been investigated most thoroughly by Shiller [27]. The effect is observed as late as five Januaries after portfolio formation! It has now been well-established that Bayes’ rule is not an apt characterization of how individuals actually respond to new ddebondt Kahneman et al. A commonprocedureis to estimate the parametersof the market model see e.

Clearly,the successive 46 yearly selections are not independent.

De Bondt and Thaler,Does the Stock Market Overreact_百度文库

If trading continues, the last return ends with the last listed price. As the cumulative average residuals during the formation period for 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.

This observation is in agreement with the naive version of the tax-loss selling hypothesis as explained by, e. Finally, the choice of December as the “portfolio formation month” and, therefore, of January as the “starting month” is essentially arbitrary. They are consistent with the overreaction hypothesis.

Both classes of behavior can be characterizedas displaying overreaction. As long as the variation in Em R? In Section I, it was mentioned that the use of market-adjustedexcess returns is likely to bias the researchdesign against the overreactionhypothesis. 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 test whether it w,t is significantly different from zero.


What are the equilibria conditions for marketsin which some agents are not rational in the sense that they fail to revise their expectations accordingto Bayes’ rule? 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.

This result may be due to his particular definition of the tax-loss selling measure. They are also insensitive to the choice of December as the month of portfolio formation see De Bondt [7].

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

Winner portfolios, on the other hand, earn about 5. Shiller concludes that, at least over the last century, dividends simply do not vary enough to rationally justify observedaggregateprice movements. Of course, unless these omitted factors can be identified, the hypothesis is untestable.

This study of marketefficiencyinvestigateswhethersuch behavioraffects stock prices.

The problem is particularlysevere with respect to the winner portfolio. The financial support of the C. On each of the 16 relevant portfolio formation dates DecemberDecemberMost importantly,the extraordinarilylarge positive excess returns earned by the loser portfolio in January.

Two specific examples of the research to which Arrowwas referringare the excess volatility of security prices and the so-called price earnings ratio anomaly. 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 resultsalso Portfolios and shed new light on the Januaryreturnsearnedby prior”winners” “losers.