University of Wisconsin at Madison and Cornell University, respectively. The financial support of the C.I.M. Doctoral Fellowship Program (Brussels, Belgium) and the Cornell Graduate School of Management is gratefully acknowledged. We received helpful comments from Seymour Smidt, Dale Morse, Peter Bernstein, Fischer Black, Robert Jarrow, Edwin Elton, and Ross Watts.
Does the Stock Market Overreact?
Article first published online: 30 APR 2012
1985 The American Finance Association
The Journal of Finance
Volume 40, Issue 3, pages 793–805, July 1985
How to Cite
De BONDT, W. F. M. and THALER, R. (1985), Does the Stock Market Overreact?. The Journal of Finance, 40: 793–805. doi: 10.1111/j.1540-6261.1985.tb05004.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Research in experimental psychology suggests that, in violation of Bayes' rule, most people tend to “overreact” to unexpected and dramatic news events. This study of market efficiency investigates whether such behavior affects stock prices. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Substantial weak form market inefficiencies are discovered. The results also shed new light on the January returns earned by prior “winners” and “losers.” Portfolios of losers experience exceptionally large January returns as late as five years after portfolio formation.