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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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 Keim . Publisher contact information may be obtained at http: A Test of the Efficient MarketHypothesis.
This study of marketefficiencyinvestigateswhethersuch behavioraffects stock prices. Most importantly,the extraordinarilylarge positive excess returns earned by the loser portfolio in January.
They are also insensitive to the choice of December as the month of portfolio formation see De Bondt . While we are highly sensitive to these issues, we do not have the space to address them here. First, if in early January selling pressure disappears and prices “rebound”to equilibriumlevels, why does the loser portfolio-even while it outperformsthe market-“rebound” once again in the second January of the test period? The requirementthat 85 subsequent returns are available before any firm is allowed in the sample biases the selection towards large, established firms.
Secondly,if prices “rebound” January, why is that effect so much larger in magnitude than the selling pressure that “caused”it during the final months of the previous year? Clearly,the successive 46 yearly selections are not independent. Table I confirms the prediction of the overreaction hypothesis. Clearly,the numberof independent replicationsvaries inversely with the length of the formationperiod.
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. The problem is particularlysevere with respect to the winner portfolio. Two specific examples of the research to which Arrowwas referringare the excess volatility of security prices and the so-called price earnings ratio anomaly.
Their combined citations are counted only for the first article.
Specifically, two hypotheses are suggested: Therefore,no statistical tests are performed. 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 taler from zero.
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. Figure edbondt shows the movement of the ACAR’s as we progress through the test period. 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?
In order to check whether the choice affects the results, some of the empirical tests use May as the portfolio formation month. Constitutional Political Economy 19 4, Twelve months into the test period, the difference in performancebetween the extreme portfolios is a debkndt 5.
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A third hypothesis, advocated by Marsh and Merton , is that Shiller’sfindingsare a result of his misspecificationof the dividendprocess. Most of the problems arise with the use of daily data, both with respect to the risk and return variables. Shiller concludes that, at least over 1895 last century, dividends simply do not vary enough to rationally justify observedaggregateprice movements.
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. The next section describes the actual empirical tests we have performed.
This study was undertakento investigate the possibility that these phenomena are related by more than just appearance.
De Bondt and Thaler,Does the Stock Market Overreact_百度文库
As time goes on and new securities appear on the tape, more and more stocks qualify for this step. To repeat, our goal is to test whether the overreactionhypothesis is predictive. North-Holland, reprint of edition. However, this is not actually observed.
Length of Formation 0. An Ghaler the Size Effect. The financial support of the C. Journal of Financial Economics 12 June The step is repeated 16 times for all nonoverlappingthreeyear periods between January and December Handbook of the Economics of Finance 1, An alternative behavioral explanation for the anomaly based on investor hypothesis e.
New articles by this author. 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. The measure is related to the securities’ relative price movementsover the last six monthspriorto portfolioformationonly.
New citations to this author.
We will focus on stocks that have experiencedeither extreme capital gains or extreme losses over periods up to five years. The related question of market equilibria with agents having heterogeneous expectations is investigated by Jarrow .