Stock market overreaction and fundamental valuation. Theory and empirical evidence (Q5950455)

The books makes an attempt to explain the so-called \textit{winner-loser effect} (WLE) in stock markets. This special finding of intertemporal dependence is due to \textit{R. R. De Bondt} and \textit{M. Thaler} [J. Finance 40, 793--805 (1985)], who observed that former overperforming stocks (the winner stocks) underperform the market subsequently and vice versa. The ruling paradigm in financial economics is that stock markets are efficient, i.e., stock prices reflect all available information at a certain point in time, and that stock returns can be explained within a framework of rational asset pricing. The main question of the book is whether the WLE can be explained within this paradigm. An alternative explanation is that stock returns are due to irrational behaviour of market participants. The author relates the WLE to two sets of explanatory variables: the capital asset pricing model (CAPM) and changes in fundamentals such as dividends and profits. He shows that the CAPM can explain only a small part of the WLE, and induces that the WLE is related to changes in fundamentals. Thus the main discovery of the book is that for the WLE stock returns and changes in fundamentals move in parallel. Two interpretations of this are presented. 1. According to the new paradigm of irrational behaviour of investors, an overreaction of positive news in the case of winner firms and of negative news in the case of loser firms takes place. 2. According to the old paradigm of market efficiency, fundamentals might proxy for changes in the exposure with respect to systematic risk. The main question of the monograph remains unresolved. Both the old and the new paradigm provide an explanation of the WLE. The findings of this remarkable book is just a starting point for further research. Contents. Part I. The Winner-Loser Effect. Chapter 1. Literature. Chapter 2. Empirical Evidence for Germany. Part II. Explaining the WLE: CAPM versus Fundamentals. Chapter 3. Explaining the WLE: Theory. Chapter 4. The CAPM and the WLE. Chapter 5. Fundamentals and the WLE. Chapter 6. Fundamentals versus Beta-What Drives Stock Returns? Part III. Explaining Cycles in Fundamentals. Chapter 7. Reversals in Stock Returns and Temporary Problems of Corporate Control.