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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.

Suggested Citation

  • Hwang, Soosung & Rubesam, Alexandre, 2013. "A behavioral explanation of the value anomaly based on time-varying return reversals," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2367-2377.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2367-2377
    DOI: 10.1016/j.jbankfin.2013.01.030
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Eero J. Pätäri & Ville Karell & Pasi Luukka, 2016. "Can size-, industry-, and leverage-adjustment of valuation ratios benefit the value investor?," International Journal of Business Innovation and Research, Inderscience Enterprises Ltd, vol. 11(1), pages 76-109.
    2. Lindaas, Knut F. & Simlai, Prodosh, 2014. "The value premium, aggregate risk innovations, and average stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 303-317.
    3. Zhang, Bing & Zhou, Yun, 2015. "Asymmetries in stock marketsAuthor-Name: Wang, Peijie," European Journal of Operational Research, Elsevier, vol. 241(3), pages 749-762.

    More about this item

    Keywords

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

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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