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Long‐Term Return Reversals: Overreaction or Taxes?
Author(s) -
GEORGE THOMAS J.,
HWANG CHUANYANG
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01295.x
Subject(s) - economics , term (time) , stock (firearms) , monetary economics , irrational number , investment (military) , econometrics , financial economics , mathematics , mechanical engineering , physics , geometry , quantum mechanics , politics , political science , law , engineering
Long‐term reversals in U.S. stock returns are better explained as the rational reactions of investors to locked‐in capital gains than an irrational overreaction to news. Predictors of returns based on the overreaction hypothesis have no power, while those that measure locked‐in capital gains do, completely subsuming past returns measures that are traditionally used to predict long‐term returns. In data from Hong Kong, where investment income is not taxed, reversals are nonexistent, and returns are not forecastable either by traditional measures or by measures based on the capital gains lock‐in hypothesis that successfully predict U.S. returns.