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Vol.5 , No. 1, Publication Date: Jan. 11, 2018, Page: 1-6
, then investors whose trading decisions are biased by the gambler's fallacy may believe that the respective stock's price is going to change its direction. This belief in stock price reversals may result in a selling (buying) pressure on the stock's price, and respectively, in negative (positive) abnormal stock returns. I analyze a large historical sample of stocks currently making up the S&P 500 Index, and find that following relatively long sequences of trading days characterized by the same-sign returns for given stocks, the respective stocks' abnormal returns tend to obtain the opposite sign. The effect becomes even more pronounced following longer preceding return sequences. It is stronger for small and volatile stocks and remains significant after accounting for a number of relevant company- and market-specific factors.&picture=http://www.aascit.org/aascit/decorators/img/journal/918.jpg)
| [1] | Andrey Kudryavtsev, Economics and Management Department, The Max Stern Yezreel Valley College, Emek Yezreel, Israel. |
The present study analyzes stock returns in order to shed light on the effect of the gambler's fallacy on investors' beliefs. I expect that if during several trading days in a row a stock's price rises (falls), then investors whose trading decisions are biased by the gambler's fallacy may believe that the respective stock's price is going to change its direction. This belief in stock price reversals may result in a selling (buying) pressure on the stock's price, and respectively, in negative (positive) abnormal stock returns. I analyze a large historical sample of stocks currently making up the S&P 500 Index, and find that following relatively long sequences of trading days characterized by the same-sign returns for given stocks, the respective stocks' abnormal returns tend to obtain the opposite sign. The effect becomes even more pronounced following longer preceding return sequences. It is stronger for small and volatile stocks and remains significant after accounting for a number of relevant company- and market-specific factors.
Keywords
Abnormal Stock Returns, Gambler's Fallacy, Investment Decisions, Price Reversals, Stock Return Sequences
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