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Further Evidence On Investor Overreaction and Stock Market Seasonality

Authors

  • WERNER F. M. De BONDT,

  • RICHARD H. THALER

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    • University of Wisconsin at Madison and Cornell University, respectively. We thank K. C. Chan, Alan Kraus, Josef Lakonishok, Theo Vermaelen and members of the Cornell and Wisconsin finance workshops for helpful comments. Graham Lemke and Charles Lee provided expert computational assistance. All remaining errors are our own. We would like to acknowledge financial support from the Pete Johnson Fund for Research in Finance at the University of Wisconsin-Madison (De Bondt) and from the Behavioral Economics Program of the Alfred P. Sloan Foundation (Thaler).

ABSTRACT

In a previous paper, we found systematic price reversals for stocks that experience extreme long-term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow-up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM-betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short-term and long-term past performance, as well as to the previous year market return.

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