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Journal of Finance Vol. 62 No. 6 2007

Long‐Term Return Reversals: Overreaction or Taxes?

Thomas J. George1,2,3; Chuan-Yang Hwang3,4

1 Nanyang Technological University · 2 University of Houston · 3 University of Hong Kong · 4 Anyang University

open access

Abstract

Long‐term reversals in U.S. stock returns are better explained as the rational reactions of investors to locked‐in capital gains than an irrational overreaction to news. Predictors of returns based on the overreaction hypothesis have no power, while those that measure locked‐in capital gains do, completely subsuming past returns measures that are traditionally used to predict long‐term returns. In data from Hong Kong, where investment income is not taxed, reversals are nonexistent, and returns are not forecastable either by traditional measures or by measures based on the capital gains lock‐in hypothesis that successfully predict U.S. returns.

DOI
10.1111/j.1540-6261.2007.01295.x
Volume
62
Issue
6
Pages
2865-2896
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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