Journal of Banking & Finance Vol. 37 No. 7 2013
A behavioral explanation of the value anomaly based on time-varying return reversals
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.
- DOI
- 10.1016/j.jbankfin.2013.01.030
- Volume
- 37
- Issue
- 7
- Pages
- 2367-2377
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib