Time Variation in Extrapolation and Anomalies

We find that the degree of extrapolative weighting in investors’ beliefs (DOX) has strong predictive power for a broad set of overreaction-related anomalies in the stock market. The average return spread of these anomalies is about [Formula: see text] per month following high DOX periods and [Formula: see text] per month following low DOX periods. In sharp contrast, DOX has opposite, but weaker, predictive power for underreaction-related anomalies. In addition, the predictive power of DOX is robust after controlling for a broad set of economic forces. Moreover, most of the DOX effect on long-short anomaly returns derives from the short legs of these overreaction-related anomalies, suggesting that time variation in DOX leads to more time variation in overpricing than in underpricing, probably because of short-sale impediments. This paper was accepted by Lukas Schmid, finance. Funding: Z. Su received financial support from Lingnan University [Faculty Research Grants DB25A5 and 103664]. Y. Wang received financial support from the National Natural Science Foundation of China [Grant 72503264]. J. Yu received financial support from the National Natural Science Foundation of China [Grants 72141304 and 72342020]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06850 .

• 저널Management Science
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.2024.06850
• 저자Wei He, Zhiwei Su, Yuehan Wang, Jianfeng Yu