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The Death of the Overreaction Anomaly? A Multifactor Explanation of Contrarian Returns


  • Adam Clements

    () (QUT)

  • Michael E. Drew
  • Evan M. Reedman


Are 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.

Suggested Citation

  • Adam Clements & Michael E. Drew & Evan M. Reedman, 2007. "The Death of the Overreaction Anomaly? A Multifactor Explanation of Contrarian Returns," School of Economics and Finance Discussion Papers and Working Papers Series 219, School of Economics and Finance, Queensland University of Technology.
  • Handle: RePEc:qut:dpaper:219
    Note: # Corresponding author: Corresponding author: Tel: 07 3138 1481; Fax 07 3138 1500; Email:; 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.

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    Cited by:

    1. Mynhardt, H. R. & Plastun, Alex, 2013. "The Overreaction Hypothesis: The Case of Ukrainian Stock Market," MPRA Paper 58941, University Library of Munich, Germany.
    2. repec:kap:iaecre:v:19:y:2013:i:2:p:131-151 is not listed on IDEAS
    3. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2014. "Short-Term Price Overreaction: Identification, Testing, Exploitation," Discussion Papers of DIW Berlin 1423, DIW Berlin, German Institute for Economic Research.
    4. Dimitrios Kyriazis & Chris Christou, 2013. "A Re-examination of the Performance of Value Strategies in the Athens Stock Exchange," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(2), pages 131-151, May.
    5. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun, 2015. "Long-Term Price Overreactions: Are Markets Inefficient?," Discussion Papers of DIW Berlin 1444, DIW Berlin, German Institute for Economic Research.

    More about this item


    Overreaction; anomaly; multifactor asset pricing model;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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