Long-Term Reversals: Overreaction or Taxes?

Posted: 10 Mar 2008

See all articles by Chuan-Yang Hwang

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Thomas J. George

University of Houston - Department of Finance

Abstract

Long-term reversals in U.S. stock returns are better explained as the rational reactions of investors to locked-in capital gains than an irrational overreaction to news. Predictors of returns based on the overreaction hypothesis have no power, while those that measure locked-in capital gains do, completely subsuming past returns measures that are traditionally used to predict long-term returns. In data from Hong Kong, where investment income is not taxed, reversals are nonexistent, and returns are not forecastable either by traditional measures or by measures based on the capital gains lock-in hypothesis that successfully predict U.S. returns.

Keywords: Reversals, overreaction, contrarian

Suggested Citation

Hwang, Chuan-Yang and George, Thomas J., Long-Term Reversals: Overreaction or Taxes?. Journal of Finance, Vol. 62, No. 6, pp. 2865-2896, 2007. Available at SSRN: https://ssrn.com/abstract=1104490

Chuan-Yang Hwang (Contact Author)

Nanyang Technological University (NTU) ( email )

Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)

Thomas J. George

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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