Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency

Abstract

This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3‐to 12‐month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented.

Market Efficiency and Technical Analysis Can they Coexist?

“…He also notes that when prices break through (or fail to break through) a resistance area, the fact that people believe that it's important will make something happen. (Note 4) Black's (1971) logic is also consistent with Jegadeesh and Titman (1993) and with a later seminal paper by Scharfstein and Stein (1990) in which they propose a model of herd behavior. They argue that herd behavior among money managers could partially explain stock market volatility as they mimic each other's trades in an effort to preserve their reputations as sensible decision makers.…”

“…the changes in ISSN 1948-5433 2013 www.macrothink.org/rae price), but that these changes form distinct patterns that repeat and are therefore predictable. Indeed, Pring (1991) Pring's (1991) argument is consistent with the literature on momentum beginning with Jegadeesh and Titman (1993), but it is in contrast to Black (1971) who, as noted earlier, argues that technical analysis seems like it should work except for the now well-known anticipatory decision-process that traders would use to arbitrage away any such patterns as they learn from past patterns. Yet, even now, patterns do not always appear to be arbitraged away as evidenced by the literature on momentum, the Presidential Election Cycle(Note 3), and other lines of research.…”

Searching for a listed infrastructure asset class using mean–variance spanning

“…Each project company is a special-purpose vehicle created solely to deliver an infrastructure project and financed on a nonrecourse basis with sponsor equity, shareholder loans, and senior debt. 4 Such factors include the Fama and French (1992) size and value premiums, the term and default premiums (Fama and French 1993), and the momentum anomaly identified by Jegadeesh and Titman (1993). Bender et al (2010) show that these premiums are uncorrelated with each other and that they increase returns and reduce portfolio volatility over traditional asset class allocations.…”

Active Management and Price Efficiency of Exchange-traded Funds

“…Even though contrarian strategies have attracted a lot of attention in the literature, recent studies (Jegadeesh and Titman, 1993) on price effi ciency concentrate on relative strength of momentum strategies. Such strategy is totally different from the contrarian strategy, because buying past winners and selling past losers with a longer formation and holding horizon are its conspicuous characteristics.…”