What's Causing Overreaction? An Experimental Investigation of Recency and the Hot-hand Effect*
Theo Offerman,Joep Sonnemans +1 more
TL;DR: In this article, a substantial body of empirical literature provides evidence of overreaction in markets and two hypotheses are consistent with this observation: the hot-hand hypothesis and the recency hypothesis.
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Abstract: 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.
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TL;DR: In this article, the authors show that strategies that buy stocks that have performed well in the past and sell stocks that had performed poorly in past years generate significant positive returns over 3- to 12-month holding periods.
Does the Stock Market Overreact
TL;DR: In this article, a study of market efficiency investigates whether people tend to "overreact" to unexpected and dramatic news events and whether such behavior affects stock prices, based on CRSP monthly return data, is consistent with the overreaction hypothesis.
Investor Psychology and Security Market Under- and Overreactions
TL;DR: The authors proposed 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.
A model of investor sentiment
TL;DR: The authors presented a parsimonious model of investor sentiment, or of how investors form beliefs, based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
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A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets
Harrison Hong,Jeremy C. Stein +1 more
TL;DR: In this paper, the authors model a market populated by two groups of boundedly rational agents: "newswatchers" and "momentum traders" and provide a unified account of under- and overreactions.