The death of the overreaction anomaly

a multifactor explanation of contrarian returns

Adam Clements*, Michael E. Drew, Evan M. Reedman, Madhu Veeraraghavan

*Corresponding author for this work

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

Are the returns accruing to De Bondt and Thaler's (1985) (DT) much celebrated overreaction anomaly pervasive? Using the CRSP data set used by DT for the period of 1926 through 1982, and 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 when risk is unaccounted for. 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 seeming driven by the factors of size and value, not the hypothesized 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.

Original languageEnglish
Pages (from-to)76-85
Number of pages10
JournalInvestment Management and Financial Innovations
Volume6
Issue number1
Publication statusPublished - 2009

Keywords

  • Anomaly
  • Multifactor asset pricing model
  • Overreaction

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