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A behavioral explanation of the value anomaly based on time-varying return reversals

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  • Hwang, Soosung
  • Rubesam, Alexandre

Abstract

We investigate the dynamics of the value anomaly in order to identify the driving forces of the anomaly. We show that the large positive value-minus-growth portfolio returns are explained by an over-reaction (under-reaction) to the positive (negative) market movements in short, specific time periods, during which the average returns of value-minus-growth portfolios are more than 2% a month. We propose an explanation based on behavioral biases: the dynamics of the value anomaly reflect the increased speed of return reversals subsequent to overreaction. Two conditions that increase the return reversals are proposed: when investors respond to public signals asymmetrically or when public signals become noisy. Our empirical results reveal that the value anomaly is explained by either one of these two channels.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 7 ()
Pages: 2367-2377

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2367-2377

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Overconfidence; Self-attribution bias; Value anomaly; Return reversals;

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References

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