Time Variation in Extrapolation and Anomalies

Wei HE; Zhiwei SU; Yuehan WANG; Jianfeng YU

doi:10.1287/mnsc.2024.06850

Time Variation in Extrapolation and Anomalies

Wei HE
, Zhiwei SU
, Yuehan WANG
, Jianfeng YU^*

^*Corresponding author for this work

Lingnan University

Research output: Journal Publications › Journal Article (refereed) › peer-review

Abstract

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 0.86%
per month following high DOX periods and −0.31%
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.

Original language	English
Journal	Management Science
DOIs	https://doi.org/10.1287/mnsc.2024.06850
Publication status	E-pub ahead of print - 19 Feb 2026

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].

Keywords

extrapolation
overreaction
underreaction
mispricing
factor

Access to Document

10.1287/mnsc.2024.06850

https://pubsonline.informs.org/doi/10.1287/mnsc.2024.06850

Extrapolative Expectations and Capital Market Anomalies
SU, Z. (PI)
LU Research Committee
15/11/24 → 14/11/26
Project: Grant Research
Subjective Expectations and Asset Prices
SU, Z. (PI)
LU Research Committee
1/10/24 → 30/09/26
Project: Grant Research

Cite this

@article{1c5fb0356a27429c8cd889bfa64b723a,

title = "Time Variation in Extrapolation and Anomalies",

abstract = "We find that the degree of extrapolative weighting in investors{\textquoteright} 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 0.86\% per month following high DOX periods and −0.31\% 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.",

keywords = "extrapolation, overreaction, underreaction, mispricing, factor",

author = "Wei HE and Zhiwei SU and Yuehan WANG and Jianfeng YU",

year = "2026",

month = feb,

day = "19",

doi = "10.1287/mnsc.2024.06850",

language = "English",

journal = "Management Science",

issn = "0025-1909",

publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",

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TY - JOUR

T1 - Time Variation in Extrapolation and Anomalies

AU - HE, Wei

AU - SU, Zhiwei

AU - WANG, Yuehan

AU - YU, Jianfeng

PY - 2026/2/19

Y1 - 2026/2/19

N2 - 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 0.86% per month following high DOX periods and −0.31% 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.

AB - 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 0.86% per month following high DOX periods and −0.31% 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.

KW - extrapolation

KW - overreaction

KW - underreaction

KW - mispricing

KW - factor

U2 - 10.1287/mnsc.2024.06850

DO - 10.1287/mnsc.2024.06850

M3 - Journal Article (refereed)

SN - 0025-1909

JO - Management Science

JF - Management Science

ER -

Time Variation in Extrapolation and Anomalies

Abstract

Funding

Keywords

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Projects

Extrapolative Expectations and Capital Market Anomalies

Subjective Expectations and Asset Prices

Cite this