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Long-Term Market Overreaction or Biases in Computed Returns?

Jennifer Conrad and Gautam Kaul
The Journal of Finance
Vol. 48, No. 1 (Mar., 1993), pp. 39-63
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328881
Stable URL: http://www.jstor.org/stable/2328881
Page Count: 25
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Long-Term Market Overreaction or Biases in Computed Returns?
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Abstract

We show that the returns to the typical long-term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single-period (monthly) returns over long intervals. The cumulation process not only cumulates "true" returns but also the upward bias in single-period returns induced by measurement errors. We also show that the remaining "true" returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

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