The Death of the Overreaction Anomaly? A Multifactor Explanation of Contrarian Returns
AbstractAre the returns accruing to De Bondt and Thaler’s (1985) (DT) much celebrated overreaction anomaly pervasive? Using the CRSP data set used by for the period 1926 through 1982, and, for the first time, an additional two decades of data (1983 through 2003), we provide preliminary support for the original work of DT, reporting that the overreaction anomaly has not only persisted over the past twenty years but has increased, on a risk-unadjusted basis. However, using the three factor model of Fama and French (1993) (FF), we find no statistically significant alpha can be garnered via the overreaction anomaly, with contrarian returns driven by the factors of size and value, not the behavioral biases of investors. It is our conjecture that the anomaly is not robust under the FF framework, with ‘contrarian’ investors following such a scheme simply compensated for the inherent portfolio risk held.
Download InfoIf 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.
Bibliographic InfoPaper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 219.
Date of creation: 01 Jun 2007
Date of revision:
Note: # Corresponding author: Corresponding author: Tel: 07 3138 1481; Fax 07 3138 1500; Email: email@example.com; Mail: School of Economics and Finance, QUT, GPO Box 2434, Brisbane, Queensland, Australia, 4001. *Queensland University of Technology (Clements, Drew & Reedman) and ^Monash University (Veeraraghavan). Reedman acknowledges support provided by the School of Economics and Finance, QUT and the Brian Gray Scholarship (jointly funded by the Australian Prudential Regulation Authority and the Reserve Bank of Australia). The authors thank participants at the FIRN Doctoral Tutorial 2005, the 18th Australasian Finance & Banking Conference, the 5th Global Conference on Business & Economics and the 2006 Business & Economics Society International Conference for helpful comments. All errors remain the sole responsibility of the authors.
Contact details of provider:
Postal: GPO Box 2434, BRISBANE QLD 4001
Web page: http://www.bus.qut.edu.au/faculty/economics/
More information through EDIRC
Overreaction; anomaly; multifactor asset pricing model;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Angela Fletcher).
If references are entirely missing, you can add them using this form.