Does the Stock Market Overreact our concern to avoid certain measurement problems that have received much attention in the literature. Most of the problems arise with the use of daily data both with respect to the risk and return variables. They include, among others the " bid -ask"effect and the consequences of infrequent trading The requirement that 85 subsequent returns are available before any firm is allowed in the sample biases the selection towards large, established firms. But if the effect under study can be shown to apply to them, the results are, if anything, more interesting. In particular, it counters the predictable critique that the overreaction effect may be mostly a small-firm phenomenon. For the exper iment described in Section A, between 347 and 1,089 NYSE stocks participate in the various replications The decision to study the CAr's for a period of 36 months after the portfolio formation date reflects a compromise between statistical and economic consid erations, namely, an adequate number of independent replications versus a time period long enough to study issues relevant to asset pricing theory. In addition the three-year period is also of interest in light of Benjamin grahams contention that the interval required for a substantial undervaluation to correct itself averages approximately 11 to 21 years"[10, p. 37). However, for selected experiments, the portfolio formation(and testing) periods are one, two, and five years long. Clearly, the number of independent replications varies inversely with the length of the formation period Finally, the choice of December as the " portfolio formation month"(and, therefore, of January as the starting month")is essentially arbitrary. In order to check whether the choice affects the results, some of the empirical tests use May as the portfolio formation month I. The Overreaction Hypothesis: Empirical Result A. Main Findings The results of the tests developed in Section I are found in Figure 1. They are consistent with the overreaction hypothesis. Over the last half-century, loser portfolios of 35 stocks outperform the market by, on average, 19.6%, thirty-six months after portfolio formation. winner portfolios, on the other hand, earn about 5.0% less than the market, so that the difference in cumulative average residual between the extreme portfolios, [ACARL, 36- ACARw, 3] equals 24.6% (t-statistic: 2.20). Figure 1 shows the movement of the ACAR's as we progress through the test period The findings have other notable aspects First, the overreaction effect is asymmetric; it is much larger for losers than for winners. Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January. In months t=l, t= 13, and t= 25, the pectively, 8.1%(t-statistic: 3.21), 5.6% (3.07), and 4.0%(2.76). Finally, in surprising agreement with Benjamin Grahams claim, the overreaction phenomenon mostly occurs during the second and thire hs into performance between the extreme portfolios is a mere 5.4%(t-statistic: 0.77)