Mar 22 2020

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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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? 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.

Twelve months into the test period, the difference in performancebetween the extreme portfolios is a mere 5.

What is an appropriatereaction? 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. While the overreactionhypothesis has considerablea priori appeal,the obvious question to ask is: If some or all of the raw return data beyond month 85 are missing, the residual returns are calculated up to that point.

The term overreaction carries with it an implicit comparison to some degree of reaction that is consideredto be appropriate. For every stockj on the tape with at least 85 months of returndata months 1 through 85without any missing values in between, and starting in January month 49the next 72 monthly residualreturns ujt months 49 through are estimated.


We will focus on stocks that have experiencedeither extreme capital gains or extreme losses over periods up to five years. The excess volatility issue has been investigated most thoroughly by Shiller [27]. Empirical Tests The empirical testing proceduresare a variant on a design originally proposed by Beaver and Landsman [5] in a different context.

One method that allows us to further accentuate the strength of the January effect is to increase the number of replications. Differencesin CumulativeAverageResidualBetween Winner and Loser Portfolios of 35 Stocks formedover the previousone, two, thalee three debonndt months into the test period 1. Thus, the loser portfolios not only outperformthe winnerportfolios;if the CAPM is correct, they are also significantly less risky.

This rule-of-thumb,an instance of what Kahneman and Tversky call the representativeness heuristic, violates the basic statistical principal that the extremeness of predictions must be moderatedby considerationsof predictability.

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

However, since all three methods are single-index models that follow debodnt the CAPM, misspecification problems may still confound the results. This systematic bias may be responsible for the earlier observed asymmetryin the return behavior of the extreme portfolios. Both hypotheses imply a violation of weak-form market efficiency. To repeat, our goal is to test whether the overreactionhypothesis is predictive. The remainderof the paper is organizedas follows. De Bondt and Richard Thaler Source: One class,of tasks which have a well-established norm are probability revision problemsfor debpndt Bayes’ rule prescribesthe correctreactionto new information.

De Bondt [7] formally derives the econometric biases in the estimated marketadjusted and market model residuals if the “true”model is multifactor, e. Length of Formation 0.

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The effect is observed as late as five Januaries after portfolio formation! Of course, unless these omitted factors can be identified, the hypothesis is untestable.


As a final precaution, he also characterizes the securities in the extreme portfolios in terms of a number of financial variables. On each of the 16 relevant portfolio formation dates DecemberDecemberIt has now been well-established that Bayes’ rule is not an apt characterization of how individuals actually respond to new data Kahneman et al.

Werner De Bondt – Wikipedia

In Section I, it was mentioned that the use of market-adjustedexcess returns is likely to bias the researchdesign against the overreactionhypothesis. Ball [2] emphasizes the effects of omitted risk factors.

Cumulative Average Residuals for Winner and Loser Portfolios of 35 Stocks months into the test period While not reported here, the results using market model and Eebondt residualsare similar. For a formation period as short as one year, no reversal is observed at all.

Therefore,we will only report the results based on market-adjusted excess returns. Shiller interprets the Miller-Modiglianiview of stock prices as a constraint on the likelihood function of a price-dividendsample.

Werner De Bondt

The procedure is repeated 16 times starting in JanuaryJanuaryIn revising their beliefs, individuals tend to overweight recent information and underweightprior or base rate data. The question then arises whether such behavior matters 19885 the market level.

Their findings largely redefine the small firm effect as a “losing firm” effect around the turn-of-theyear. There ‘ Of course,the variabilityof stock prices may also reflect changes in real interest rates. Instead, we will concentrate on an empiricaltest of the overreaction hypothesis. Finally, in surprisingagreementwith Benjamin Graham’s claim, the overreactionphenomenon mostly occurs during the second and third year of the test period.