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126 selecting securities
movements in dividends that can be predicted plus a term reflecting
the anticipation of fashions or fads among investors.”
11. The excess volatility argument.remains controversial. For summary a
of the debate, see Camerer and Weigelt (1986). Shiller (1987), pp.
320-321, discusses departures from value, rather than excess
volatility, as evidence of fads.
12. See Niederhoffer (1971) on world news; Arrow (1982), Shiller (1984),
and DeBondt (1985) on financial news; and Renshaw (1984) on
panics. [OHanlon and Ward (1986) contend that Renshaw’s rules
fail out-of-sample tests.] Other markets may also overreact [Frankel
and Meese (1987)l.
13. Chan (1988) claims that DeBondt and Thaler’s reversal effect is
explained by changing risk Stocks suffering price declines become
riskier, and this heightened risk explains their subsequent
outperformance. However, DeBondt and Thaler (1987) demonstrate
that losers subsequently have higher betas in up markets and lower
betas in down markets, and thus reject the changing-risk
explanation. Fama and French (1987b) advance two possible
explanations for the price reversals-market inefficiency and
changing +k premiums.
14. French and Roll (1986) find that a significant portion of market
volatility is due to mispricing. DeLong et al. (1987) maintain that
noise traders cause prices to deviate so far from fair value as to
create serious consequences for society as a whole.
15. Black, quoted in Bemstein (1987u), p. 56. Shefrin and Statman (1987)
ascribe the persistence of noise trading to errors in cognition.
16. Akerlof and Yellen (1985) demonstrate that small amounts of
irrationality can have large economic effects. See references to
experimental markets in Plott (1987) and Hausch, Ziemba, and
Rubinstein (1981).
17. For a theoretical elaboration, see Russell and Thaler (1985).
IS. DeLong et al. (1987) demonstrate that irrational traders can earn
higher returns because they bear the large amount of risk that they
induce, and this risk scares off more rational investors.
19. For a theoretical model, see Aiyagari (1988).
20. Furthermore, Jacobs (1986) shows a simple financial measure to be
superior to present value in predicting stock returns to changes in .
depreciation accounting methods having real economic impacts.
21. For neglect, see Arbell, Carvell, and Strebel (1983); for sigma, see
Levy (1978); and for earnings controversy, see Amott (1983).