Werner F. M. De Bondt and Richard Thaler
Journal of Finance, Volume 40, Issue 3, Papers and Proceedings of the Forty-Third Annual Meeting American Finance Association

Abstract

Research in experimental pschology suggests that, in violation of Bayes' rule, most people tend to "overreact" to unexpected and dramatic news events. The study of market efficiency investogates whether such behaviour affects stock prices. The empirical evidence, based on SRCP monthly return data, is consistent with the overreaction hypothesis. Substantial weak-form market efficiencies are discovered. The results also she new light on the January returns earned by prior "winner" and "losers". Portfolios of loser experience exceptionally large January returns as last as five years after portfolio formation.