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Is Stock Market Overreaction Persistent Over Time?
Author(s) -
Chen Carl R.,
Sauer David A.
Publication year - 1997
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00094
Subject(s) - contrarian , economics , portfolio , financial economics , stock market , investment strategy , suspect , stock (firearms) , monetary economics , econometrics , psychology , market liquidity , mechanical engineering , paleontology , criminology , horse , biology , engineering
This paper examines the stability and persistence of the market overreaction hypothesis as posited by DeBondt and Thaler (1985 and 1987), and reinforced by Chopra, Lakonishok, and Ritter (1992). Using monthly CRSP data for the period 1926 through 1992, we find that returns obtained from a contrarian investment strategy are not time‐stationary. Specifically, there is no winner‐loser portfolio relationship during the post‐war period of 1940_50s. The relationship resumes during the pre‐energy‐crisis subperiod, but weakens again during the post‐energy‐crisis subperiod. The effectiveness of trading based upon the overreaction hypothesis is, therefore, suspect.