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273
Investor psychology and security market under- and overreactions
- Journal of Finance
, 1998
"... We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors ’ confidence as a function of their investment ..."
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Cited by 698 (43 self)
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We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors ’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrela-tions ~“momentum”!, short-run earnings “drift, ” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate fi-nancial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to re-f lect all publicly available information. Some of the more pervasive anoma-
A unified theory of underreaction, momentum trading and overreaction in asset markets
, 1999
"... We model a market populated by two groups of boundedly rational agents: “newswatchers” and “momentum traders.” Each newswatcher observes some private information, but fails to extract other newswatchers’ information from prices. If information diffuses gradually across the population, prices underre ..."
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Cited by 606 (33 self)
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We model a market populated by two groups of boundedly rational agents: “newswatchers” and “momentum traders.” Each newswatcher observes some private information, but fails to extract other newswatchers’ information from prices. If information diffuses gradually across the population, prices underreact in the short run. The underreaction means that the momentum traders can profit by trendchasing. However, if they can only implement simple (i.e., univariate) strategies, their attempts at arbitrage must inevitably lead to overreaction at long horizons. In addition to providing a unified account of under- and overreactions, the model generates several other distinctive implications.
Bad news travels slowly: Size, analyst coverage, and the profitability of momentum strategies
- Journal of Finance
, 2000
"... Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm ..."
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Cited by 339 (25 self)
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Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public. SEVERAL RECENT PAPERS HAVE DOCUMENTED that, at medium-term horizons ranging from three to 12 months, stock returns exhibit momentum-that is, past winners continue to perform well, and past losers continue to perform poorly. For example, Jegadeesh and Titman (1993), using a U.S. sample of NYSE/ AMEX stocks over the period from 1965 to 1989, find that a strategy that buys past six-month winners (stocks in the top performance decile) and shorts past six-month losers (stocks in the bottom performance decile) earns approximately one percent per month over the subsequent six months. Not only is this an economically interesting magnitude, but the result also appears to be robust: Rouwenhorst (1998) obtains very similar numbers in a
The Investment behavior and performance of various investor
- HAC standard errors & covariance (Prewhitening with lags = 1, Bartlett kernel, Newey-West fixed bandwidth = 4.0000) Variable Coefficient Std. Error t-Statistic Prob.
, 2000
"... Abstract Using data from Finland, this study analyzes the extent to which past returns determine the propensity to buy and sell. It also analyzes whether these di!erences in past-return-based behavior and di!erences in investor sophistication drive the performance of various investor types. We &quo ..."
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Cited by 249 (15 self)
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Abstract Using data from Finland, this study analyzes the extent to which past returns determine the propensity to buy and sell. It also analyzes whether these di!erences in past-return-based behavior and di!erences in investor sophistication drive the performance of various investor types. We "nd that foreign investors tend to be momentum investors, buying past winning stocks and selling past losers. Domestic investors, particularly households, tend to be contrarians. The distinctions in behavior are consistent across a variety of past-return intervals. The portfolios of foreign investors seem to outperform the portfolios of households, even after controlling for behavior di!erences. 2000 Elsevier Science S.A. All rights reserved. JEL classixcation: G10
Stock Price Reaction to News and No-News: Drift and Reversal After Headlines
- MIT SLOAN SCHOOL OF MANAGEMENT, WORKING PAPER
, 2002
"... Using a comprehensive database of headlines about individual companies, I examine monthly returns following public news. I compare them to stocks with similar returns, but no identifiable public news. There is a di#erence between the two sets. I find strong drift after bad news. Investors seem to re ..."
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Cited by 127 (0 self)
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Using a comprehensive database of headlines about individual companies, I examine monthly returns following public news. I compare them to stocks with similar returns, but no identifiable public news. There is a di#erence between the two sets. I find strong drift after bad news. Investors seem to react slowly to this information. I also find reversal after extreme price movements unaccompanied by public news. The separate patterns appear even after adjustments for risk exposure and other e#ects. They are, however, mainly seen in smaller, more illiquid stocks. These findings support some integrated theories of investor over- and underreaction.
Investor psychology in capital markets: evidence and policy implications
, 2002
"... We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market par ..."
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Cited by 99 (22 self)
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We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially
Foundations of technical analysis: Computational algorithms, statistical inference, and empirical implementation
- Journal of Finance
, 2000
"... Technical analysis, also known as “charting, ” has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjecti ..."
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Cited by 89 (4 self)
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Technical analysis, also known as “charting, ” has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis—the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution—conditioned on specific technical indicators such as head-and-shoulders or double-bottoms—we find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value. ONE OF THE GREATEST GULFS between academic finance and industry practice
High idiosyncratic volatility and low returns: international and further U.S. evidence
- Journal of Financial Economics, Vol.91 Issue
, 2008
"... international predictability, factor model We thank Kewei Hou and Soeren Hvidjkaer for kindly providing data. Andrew Ang acknowledges support from the NSF. ..."
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Cited by 79 (2 self)
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international predictability, factor model We thank Kewei Hou and Soeren Hvidjkaer for kindly providing data. Andrew Ang acknowledges support from the NSF.
Emerging Markets Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?” World Bank Policy Research Working Paper 2678, www.worldbank.org/research
, 2001
"... All in-text references underlined in blue are linked to publications on ResearchGate, letting you access and read them immediately. ..."
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Cited by 77 (4 self)
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All in-text references underlined in blue are linked to publications on ResearchGate, letting you access and read them immediately.
The really long-run performance of initial public offerings: The pre-NASDAQ evidence, working paper
- National Bureau of Economic Research, forthcoming in the Journal of Finance
, 2001
"... go to Girts Graudins and Eric Nierenberg for their outstanding contributions to this project. Harvard Business School’s Division of Research provided financial support. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ..."
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Cited by 71 (3 self)
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go to Girts Graudins and Eric Nierenberg for their outstanding contributions to this project. Harvard Business School’s Division of Research provided financial support. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.