Advanced Search
MyIDEAS: Login to save this paper or follow this series

Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns

Contents:

Author Info

  • Jiang, Danling

    (Ohio State U)

Abstract

I develop and test the theoretical predictions that when investor overreaction to market-wide news is larger, firm valuations in the cross section become more dispersed and stocks earn lower expected returns. Consistent with these predictions, measures of cross-sectional dispersion of firm valuations are negatively related to subsequent market and portfolio excess returns, especially for sets of firms with highly subjective valuations and significant limits to arbitrage. Further, these firms underperform those with the opposite characteristics in periods when beginning-of-period firm valuation dispersion is high. In contrast, they overperform when beginning-of-period firm valuation dispersion is low.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-8.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-8.

as in new window
Length:
Date of creation: May 2006
Date of revision:
Handle: RePEc:ecl:ohidic:2006-8

Contact details of provider:
Phone: (614) 292-8449
Email:
Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
More information through EDIRC

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, American Finance Association, vol. 61(3), pages 1073-1117, 06.
  2. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
  3. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 05-97, Wharton School Rodney L. White Center for Financial Research.
  4. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(1), pages 1-40, January.
  5. Venkat R. Eleswarapu, 2004. "The Predictability of Aggregate Stock Market Returns: Evidence Based on Glamour Stocks," The Journal of Business, University of Chicago Press, vol. 77(2), pages 275-294, April.
  6. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc.
  7. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2004. "The Cross-Section of Volatility and Expected Returns," NBER Working Papers 10852, National Bureau of Economic Research, Inc.
  8. Brennan, Michael J. & Xia, Yihong, 2005. "tay's as good as cay," Finance Research Letters, Elsevier, Elsevier, vol. 2(1), pages 1-14, March.
  9. Malcolm Baker & Jeffrey Wurgler, 1999. "The Equity Share in New Issues and Aggregate Stock Returns," Yale School of Management Working Papers, Yale School of Management ysm124, Yale School of Management, revised 01 Jan 2009.
  10. Harrison Hong & Jeremy C. Stein, 1997. "A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets," NBER Working Papers 6324, National Bureau of Economic Research, Inc.
  11. Kent Daniel & Sheridan Titman, 1996. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," NBER Working Papers 5604, National Bureau of Economic Research, Inc.
  12. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
  13. Polk, Christopher & Thompson, Samuel & Vuolteenaho, Tuomo, 2006. "Cross-sectional forecasts of the equity premium," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(1), pages 101-141, July.
  14. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 2113-2141, October.
  15. Amit Goyal & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Yale School of Management Working Papers, Yale School of Management amz2412, Yale School of Management, revised 01 Jan 2006.
  16. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  17. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(3), pages 307-343, September.
  18. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 57-82, March.
  19. Hui Guo & Robert Savickas, 2005. "Idiosyncratic volatility, stock market volatility, and expected stock returns," Working Papers, Federal Reserve Bank of St. Louis 2003-028, Federal Reserve Bank of St. Louis.
  20. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2001. "The Value Spread," NBER Working Papers 8242, National Bureau of Economic Research, Inc.
  21. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  22. J. Scheinkman & W. Xiong, 2002. "Overconfidence, Short-Sale Constraints and Bubbles," Princeton Economic Theory Working Papers, David K. Levine 98734966f1c1a57373801367f, David K. Levine.
  23. Michael J. Brennan & Ashley W. Wang & Yihong Xia, 2004. "Estimation and Test of a Simple Model of Intertemporal Capital Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 59(4), pages 1743-1776, 08.
  24. Daniel, Kent & Hirshleifer, David & Subrahmanyam, Avanidhar, 2005. "Investor Psychology and Tests of Factor Pricing Models," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2005-26, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  25. Nelson, Charles R & Kim, Myung J, 1993. " Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, American Finance Association, vol. 48(2), pages 641-61, June.
  26. Hemang Desai & K. Ramesh & S. Ramu Thiagarajan & Bala V. Balachandran, 2002. "An Investigation of the Informational Role of Short Interest in the Nasdaq Market," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 2263-2287, October.
  27. Owen Lamont, . "Earnings and Expected Returns," CRSP working papers 345, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  28. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  29. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports, Federal Reserve Bank of New York 77, Federal Reserve Bank of New York.
  30. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 209-235, November.
  31. Joao Gomes & Leonid Kogan & Lu Zhang, 2003. "Equilibrium Cross Section of Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(4), pages 693-732, August.
  32. Lewellen, Jonathan & Nagel, Stefan, 2006. "The conditional CAPM does not explain asset-pricing anomalies," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(2), pages 289-314, November.
  33. Nagel, Stefan, 2005. "Short sales, institutional investors and the cross-section of stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 78(2), pages 277-309, November.
  34. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  35. Christopher Polk & Paola Sapienza, 2004. "The Real Effects of Investor Sentiment," NBER Working Papers 10563, National Bureau of Economic Research, Inc.
  36. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  37. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 1839-1885, December.
  38. Fama, Eugene F. & French, Kenneth R., 2004. "New lists: Fundamentals and survival rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(2), pages 229-269, August.
  39. Kothari, S. P. & Shanken, Jay, 1997. "Book-to-market, dividend yield, and expected market returns: A time-series analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 44(2), pages 169-203, May.
  40. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1645-1680, 08.
  41. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  42. Pontiff, Jeffrey & Schall, Lawrence D., 1998. "Book-to-market ratios as predictors of market returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(2), pages 141-160, August.
  43. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 271-306.
  44. Charles M.C. Lee & Bhaskaran Swaminathan, 2000. "Price Momentum and Trading Volume," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 2017-2069, October.
  45. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
  46. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, American Finance Association, vol. 58(3), pages 975-1008, 06.
  47. Naiping Lu & Lu Zhang, 2005. "The Value Spread as a Predictor of Returns," NBER Working Papers 11326, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ecl:ohidic:2006-8. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.