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What’s Causing Overreaction? An Experimental Investigation of Recency and the Hot‐hand Effect
Author(s) -
Offerman Theo,
Sonnemans Joep
Publication year - 2004
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.0347-0520.2004.t01-1-00376.x
Subject(s) - economics , pessimism , autocorrelation , stock (firearms) , efficient market hypothesis , empirical evidence , econometrics , financial economics , stock market , mechanical engineering , paleontology , philosophy , statistics , mathematics , epistemology , horse , engineering , biology
A substantial body of empirical literature provides evidence of overreaction in markets. Past losers outperform past winners in stock markets as well as in sports markets. Two hypotheses are consistent with this observation. The recency hypothesis states that traders overweight recent information; they are too optimistic about winners and too pessimistic about losers. According to the hot‐hand hypothesis, traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses. The evidence is consistent with the hot‐hand hypothesis.