Behavioral Finance

Behavioral Finance Economics 437

Grading Reviews • This afternoon • Grading review (of 2nd mid-term): Monroe Basement, 3:30 – 6:30 on Tuesday, April 22nd

Foxfield – this Saturday • Burton Plot: C56

Calendar Effects • Prediction from EMH • Returns should be randomly spaced over time • Unless information is calendar based • Can information be calendar biased? (usually positive on some days; usually negative on other days)?

DeBondt-Thaler conclusions • Definite evidence of mean reversion (a form of serial correlation): • L portfolios consistently outperform W portfolios • 19.6 % better than the market after end of 3 years • W portfolios consistently underperform the market • 5 % less than the market after end of 3 years

Interesting facts • Most of the excess returns are in January • Loser effect more pronounced: • Losers earned 19.6 % more than the market • Winners earn 5.0 % less than the market • Loser portfolio minus Winner portfolio return = 24.6 %!!!!! • Most of the return difference is during 2nd and 3rd year • Larger loses become larger winners; larger winners become larger losers

Richard Thaler’s Summary in Chapter 11 on “Calendar Effects” from his book, “Winners Curse” (1992) • Rozeff and Kinney (1976) • 1904-1974 period • 3.5 percent average return in January • 0.5 percent average return in all other months • Banz (1981) and Keim(1983) • Small stocks not large stocks • Half of small firm effects come in January; half of the January returns come in first 5 days of January • Reinganum (1983) • Prior year losers, but not prior year winners • Is this widespread (countries other than the US)? • Gultekin and Gultekin (1983)…yes 16 countries • In Belgium, Netherlands, Italy Jan return larger than return for the entire year • Is this tax selling? • Kato & Shallheim, 1985: observed in Japan where there is no tax benefit • Observed in Canada prior to 1972 before there was a cap gains tax (according to Berges, McConnell and Shlarbaum, 1984) • Observed in Great Britain and Australia which begin their tax years April 1 and July 1 respectively • Grinblatt & Keloharju 2004 (Tax Selling in Finland causes January effect)

Lakonishok and Smidt 1988 • “Are Seasonal Anomalies Real? A Ninety Year Perspective? • Data from daily closes of DJ from 1897 to 1986 • Theory as protection agst data snooping…. • Interesting data facts • No stock market from Aug 1 to Dec 12 in 1914 • Saturday trading until June 1, 1952 • Results • No January effect for large stocks (high market cap stocks) • First half of the month not significantly “better” than 2nd half of the month • Blue Monday; Last trading date of the week positive • Positive “day before holiday” effect; holiday effect twide end of week effect; rates negative after holidays • Pre-Xmas negative; post-Xmas positive • Turn of the month effect

Cooper, McConnell, Ovtchinnikov (hereafter referred to as “CMO”) • Article published in 2006 • Note that there are two “January effects” • January versus next 11 months • Year end losers are January winners • They look at the following portfolios: • Large cap • Small cap • Fama French Variables • High Book to Market (Value Stocks) • Low Book to Market (Riskier Stocks) • Conclusions: • Yes, there is a January effect (Jan predicts next 11 month returns) • Works for small stocks, large stocks • High book/market stocks, low book/market stocks • Is not the same as F/F

The End

Behavioral Finance