Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If You Use a Screen Reader

This content is available through Read Online (Free) program, which relies on page scans. Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.

Market Efficiency in an Irrational World

Kent Daniel and Sheridan Titman
Financial Analysts Journal
Vol. 55, No. 6, Behavioral Finance (Nov. - Dec., 1999), pp. 28-40
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/4480207
Page Count: 13
  • Read Online (Free)
  • Subscribe ($19.50)
  • Cite this Item
Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Market Efficiency in an Irrational World
Preview not available

Abstract

We discuss why investors are likely to be overconfident and how this behavioral bias affects investment decisions. Our analysis suggests that investor overconfidence can generate momentum in stock returns and that this momentum effect is likely to be strongest in those stocks whose valuations require the interpretation of ambiguous information. Consistent with this analysis, we found that momentum effects are stronger for growth stocks than for stable stocks. A portfolio strategy based on this hypothesis generated strong abnormal returns from U.S. equity portfolios that did not appear to be attributable to risk. Although these results violate the traditional efficient market hypothesis, they do not necessarily imply that rational but uninformed investors could have actually achieved the returns without the benefit of hindsight. To examine whether unexploited profit opportunities exist, we tested for a somewhat weak form of market efficiency, adaptive efficiency, that allows for the appearance of profit opportunities in historical data but requires these profit opportunities to dissipate when they become apparent. Our tests rejected the notion that the U.S. equity market is adaptive efficient.

Page Thumbnails

  • Thumbnail: Page 
28
    28
  • Thumbnail: Page 
29
    29
  • Thumbnail: Page 
30
    30
  • Thumbnail: Page 
31
    31
  • Thumbnail: Page 
32
    32
  • Thumbnail: Page 
33
    33
  • Thumbnail: Page 
34
    34
  • Thumbnail: Page 
35
    35
  • Thumbnail: Page 
36
    36
  • Thumbnail: Page 
37
    37
  • Thumbnail: Page 
38
    38
  • Thumbnail: Page 
39
    39
  • Thumbnail: Page 
40
    40