A behavioral explanation of the value anomaly based on time-varying return reversals |
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Authors: | Soosung Hwang Alexandre Rubesam |
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Affiliation: | 1. School of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 110-745, South Korea;2. Itaú-Unibanco, São Paulo, Brazil |
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Abstract: | We investigate the dynamics of the value anomaly in order to identify the driving forces of the anomaly. We show that the large positive value-minus-growth portfolio returns are explained by an over-reaction (under-reaction) to the positive (negative) market movements in short, specific time periods, during which the average returns of value-minus-growth portfolios are more than 2% a month. We propose an explanation based on behavioral biases: the dynamics of the value anomaly reflect the increased speed of return reversals subsequent to overreaction. Two conditions that increase the return reversals are proposed: when investors respond to public signals asymmetrically or when public signals become noisy. Our empirical results reveal that the value anomaly is explained by either one of these two channels. |
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Keywords: | G12 |
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