Profiting from past winners and losers

Abstract

This paper posits that information diffusion is a function of its dissemination and assimilation. Whereas dissemination is proportional to observable factors such as volume and price volatility, assimilation is dependent on unobservable factors such as the usefulness and reliability of information. It is found that buying low-volume (or low-volatility) past losers and shortselling low-volume (or low-volatility) past winners generates a positive net return across the entire sample period and especially during bear markets. In addition, buying high-volatility past winners and shortselling high-volatility past losers generates a positive net return, especially during bear markets.