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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A commonprocedureis to estimate the parametersof the market model see e. Shiller concludes that, at least over the last century, dividends simply do not vary enough to rationally justify observedaggregateprice movements. Figure 1 shows the movement amd the ACAR’s as we progress through the test period.

Once future earnings turn out to be better than the unreasonablygloomy forecasts, the price adjusts.

However, the companies in the extreme portfolios do not systematically differ with respect to market capitalization. While the overreactionhypothesis has considerablea priori appeal,the obvious question to ask is: In spite of the observedtrendiness of dividends, investors seem to attach disproportionate importanceto short-run economic developments.

The outstanding feature of Figure 3 is, once again, the January returns on the loser portfolio. Length of the Debondr Period and No.

Werner De Bondt – Wikipedia

As the cumulative average residuals during the formation period for various sets of rhaler and loser portfolios grow larger, so do the subsequent price reversals, measured by [ACARL,t – ACARw,] and the accompanying t-statistics.

However, for selected experiments,the portfolio formation and testing periods are one, two, and five years long.

Russell and Thaler [24] addressthis issue. First, if in early January selling pressure disappears and prices “rebound”to equilibriumlevels, why does the loser portfolio-even while it thqler market-“rebound” once again in the second January of the test period? Thus, if many investorschoose to wait longer than six months before realizinglosses, the portfolio of small firms may still contain many “losers.


Please contact the publisher regarding any further use of this work. We use devondt technology and tools to increase productivity and facilitate new forms of scholarship.

Stock and the Futures The winner portfolio, on the other hand, gains value at the end of the year and loses some in January for more details, see De Bondt [7]. 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?

Does the Stock Market What is an appropriatereaction?

The requirementthat 85 subsequent returns are available before any firm is allowed in the sample biases the selection towards large, established firms. The Theoryof Investment Value.

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

The step is repeated 16 times for all nonoverlappingthreeyear periods between January and December Conclusions Research in experimental psychology has suggested that, in violation of Bayes’ rule, most people “overreact”to unexpected and dramatic news events. 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!

More recently, Arrowhas concludedthat the work of Kahneman and Anr “typifies very andd the exessive reaction to current information which seems to characterize all the securities and futures markets” [1, p. The remainderof the paper is organizedas follows. 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.


Thhaler Implicationsof Stock Return Seasonality. Cumulative Average Residuals for Winner and Loser Portfolios of 35 Stocks months into the test period While not thalr here, the results using market model and Sharpe-Lintner residualsare similar. Several aspects of the results remain without adequate explanation; most importantly,the large positive excess returns earned by the loser portfolio every January.

As long as the variation in Em R? For a formation period as short as one year, no reversal is observed at all.

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

Publisher contact information may be obtained at http: Journal of PortfolioManagement10 Winter Therefore,we will only report the results based xebondt market-adjusted excess returns. Clearly,the numberof independent replicationsvaries inversely with the length of the formationperiod.