Loser Stocks Research Articles

CONTRARIAN STRATEGY: EVIDENCE OF PRICE REVERSAL ON WINNER-LOSER PORTFOLIOS

This study aims to analyze the effectiveness of the contrarian strategy by demonstrating the existence of price reversal phenomena in winner-loser stock portfolios on the Indonesia Stock Exchange (IDX). This research differs from previous studies by comprehensively exploring the Indonesian stock market (IDX), which has characteristics distinct from developed countries. Thus, this research contributes new insights to the investment literature in emerging markets. The research approach is quantitative, utilizing monthly data in the form of stock closing prices from all companies listed on the IDX from January 2020 to June 2023, totaling 866 companies, with a selected sample of 670 companies. The hypothesis was tested using an independent sample t-test. The results show that the winner and loser stock portfolios experienced price reversal in the first month after the formation period. However, in the second and third months, the winner stock portfolio did not experience a price reversal but showed significant changes. Meanwhile, the loser stock portfolio experienced price reversals in the first, second, and third months after the formation period. Both portfolios exhibit significant differences in AAR and CAAR values, leading to the general conclusion that price reversal symmetry occurred. Such conditions present opportunities for investors or traders, serving as signals to make contrarian decisions buying loser stocks or selling winner stocks. This phenomenon also provides evidence of the winner-loser anomaly in the Indonesian capital market.

Nominal price illusion, return skewness, and momentum

We document a significantly negative association between the nominal price measure of Birru and Wang (2015) and the profit of the stock momentum strategy. The negative relationship is driven by the underperformance of loser stocks with high nominal price illusions. Further analysis shows that the previously documented positive correlations between return skewness measures and momentum profit are subsumed by the effect of nominal price on momentum profit.

Does Contrarian Investing Beat the Conventional Strategies and the Index?

Traditional momentum strategies on the stock market are implemented in accordance with the efficient market hypothesis and involve making investments in accordance with market trends. However, this hypothesis has been repeatedly criticized by supporters of behavioral finance, who allow the irrational nature of investment decisions, which led to the emergence of contrarian investment strategies, based on the overreaction hypothesis and the reversal effect (over a longer horizon, loser stocks outperform winners), according to which investments are made in opposite direction to the market, involves buying the losing stocks and selling the winners. According to contrarian investment strategies, when buying shares, investors prefer a lower level of P/E ratios (Price – earnings ratio), which indicates the valuation multiple placed to the company’s market price vis-à-vis its net profits. The article examines the hypothesis that P/E ratio and contrarian investment are related, based on data for 2010–2022 for 50 shares of India, whose stock market is developing rapidly, examines the differences between the top ten P/E stocks and the bottom ten P/E stocks using inflation adjusted return on investment (ROI) to determine, whether or not, an investment in such stocks would generate sufficient returns to outpace inflation over a period of ten years. The article tests 3 hypotheses that investing in stocks with low P/E ratios in the Nifty 50 index (a live benchmark that illustrates how each industry contributes to India’s GDP) will generate higher returns than investing in stocks with high P/E ratios, over a long-term horizon (H1), inflation (Н2), the Nifty 50 index (Н3). The sources of data were finalized to be BSE Official Website, NSE Official Website, Yahoo Finance, Screener, Annual Reports, etc. The article calculates the profits for top 10 P/E stocks (conventional strategy) and bottom 10 P/E stocks (contrarian investing), and determining the returns from top 10 P/E stocks and the bottom 10 P/E stocks (when calculating for 10 years, the same steps were repeated: synchronously, once a year, both types of shares were bought at Purchase Price and sold a year later at Market Price). The calculations confirmed all 3 proposed hypotheses. Contrarian investing delivered returns of around 3.64 times the initial investment, whereas conventional investing produced returns of about 77.5% when comparing the top 10 P/E stocks to the bottom 10 P/E stocks in the Nifty 50 index. An outstanding return of 84.11%, which is a strong return when adjusted for inflation, was achieved using the contrarian strategy. As a result of the conventional strategy’s loss of 10.45% when adjusted for inflation, the study also shows that contrarian investing can assist an investor in hedging against inflation. This emphasizes how crucial it is to take a contrarian attitude when making stock market investments. At the same time, contrarian investment returns of 3.64 times the initial investment over this period surpass the benchmark Nifty 50 Index returns, which is 3.24 times.

PERFORMANCE OF DIA AND FORWARD-LOOKING OPTIMAL PORTFOLIOS OF DOW STOCKS

Purpose- This paper compares the performance of DIA, trailing optimal portfolio and forward-looking optimal portfolio constructed from a pool of DOW stocks, applying a modified contrarian portfolio construction to the forward-looking optimization. The modified contrarian optimization of this study is based on the premise that loser stocks, in the short run, would have reversal performance and become winner stocks in the short-run future. The investigative question is: Do forward-looking optimal portfolios of DOW stocks perform better than trailing optimal portfolios of DOW stocks in the short run after DJIA hit the year's lowest point in 2022? Methodology- To answer the investigative question, this study compares the short-run performance of forward-looking optimal portfolios with the performance of trailing optimal portfolios. Elton, Gruber, and Padberg (1987) originally introduced the optimal portfolio technique. Findings- The primary focus was on the case related to September 30, 2022, when DJIA hit the lowest level in 2022. To get the trend analysis of the cases of DJIA hitting the lowest level of the year, this study examined two comparable findings, having examined the performance properties of trailing vs. forward-looking optimal portfolios using the same method. One examined the case related to March 23, 2020, and another examined the case related to December 24, 2018. It finds a robust performance of DIA compared to the performance of two forms of optimal portfolios. It also finds that forward-looking optimal portfolios performed better than trailing optimal portfolios regarding the average performance of three cases. Conclusion- It concludes the potential usefulness of DIA as evidence of the market efficiency of DOW stocks. At the same time, forward-looking optimal portfolios for short-run investment in DOW stocks are a viable alternative to investing in the DIA.

ANALISIS OVERREACTION HYPOTHESIS PADA HARGA SAHAM

The purpose of this research is to see if there is an overreaction hypothesis on stock prices on the Indonesia Stock Exchange. This study's population consists of 229 manufacturing companies registered on the Indonesia Stock Exchange between 2018 and 2022. This study's sample was drawn using a purposive sampling approach, yielding a sample of 127 companies. The study used a significance t test which was processed using SPSS 22 software. The research period is an annual period. Shares are classified into 2 types, namely winner stocks and loser stocks. The results of the study show that winner and loser stocks have experienced several reversals, but these symptoms cannot be proven statistically. As a result, there is no overreaction hypothesis for manufacturing companies registered on the Indonesia Stock Exchange between 2018 and 2022. Keywords: Overreaction Hypothesis, Winner Stocks, Loser Stocks, Abnormal Return

Predicting Winner and Loser Stocks: A Classification Approach

Predicting Winner and Loser Stocks: A Classification Approach

February, share turnover, and momentum in China

We show that significant momentum exists in China equity returns outside the month of February for both the past return and the 52-week high momentum ranking criteria. For 6-month holding periods, the magnitudes range from 73 bp to 110 bp per month in both raw and factor-adjusted returns using the China factors of Liu et al. (2019). A strong seasonal February reversal masks momentum when all months are considered together. The reversal is associated with a spike in turnover for recent loser stocks, which we attribute to an appetite for lottery-like stocks by retail investors in the season of the Chinese New Year. We show that the turnover difference between winner and loser stocks is a significant determinant of momentum in all three culturally Chinese equity markets—China, Taiwan, and Hong Kong. However, consistent with the dominance of retail investors in China, the February seasonal is weaker in Taiwan and non-existent in Hong Kong, and strong enough to mask momentum in other months only in China.

Stock repurchasing bias of mutual funds

Abstract This article shows that mutual funds’ trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We do not find that mutual fund managers are biased against repurchasing past loser stocks because of superior information. Though less likely to be repurchased, repurchased losers do not underperform repurchased winners—and the fund itself—in the subsequent quarter.

Testing the efficient market hypothesis with Indonesian Islamic Stocks during the Covid-19 pandemic

Purpose: This study aims to identify the phenomenon of overreaction in Islamic stocks during the COVID-19 pandemic and understand how various pieces of information during the pandemic influenced investors to overreact, leading to market inefficiency. Research Methodology: This study employs two main methods: an event study focusing on the overreaction phenomenon in the Islamic stock market, and cross-sectional regression to analyze the factors that influence it. Results: Overreaction was observed in the winner's stock portfolio during the announcement of Indonesia's first COVID-19 case. However, during other significant events, such as the National Economic Recovery program issuance, the arrival of the vaccine, and the highest increase in daily positive cases, overreaction was seen in both the winner and loser stock portfolios. Factors such as abnormal returns, information leakage, and company ownership are identified as significant influencers of this overreaction. These factors were found to be negatively related to cumulative abnormal returns post-event, indicating their role in the overreaction phenomenon. Limitation: This study focuses on the overreaction phenomenon of Shariah stocks in the Jakarta Islamic Index (JII) during the COVID-19 pandemic in 10 selected events from October 1, 2019, to July 23, 2021. Contribution: This study offers insights into the behavior of Islamic stocks in Indonesia during the pandemic, helping stakeholders understand market inefficiencies during crises.

Mechanisms of overpricing: An investigation on momentum crashes

This paper documents asymmetric overpricing for loser stocks across business cycle. In time of normal market conditions, we find strong interactions among key factors in determining momentum strength, and they are subject to significant investor attention. By contrast, during periods of poor market conditions, many of these interactions are not observed, suggesting that overpricing errors for loser stocks are generally weaker due to the lack of investor confidence and funding liquidity issue. A cross-sectional sample selection based on overpricing mechanism of loser stocks suggests that the damaged from momentum crashes can be eased and momentum profits can be significantly enhanced.

Impact of The Covid 19 Pandemic: Is There Overreaction in LQ 45 Stock?

The Covid-19 pandemic has had an impact on various aspects of life, including the capital market which has caused a negative response on most stock exchanges around the world, including the Indonesia Stock Exchange. The Effecieny Market Hypothesis (EMH) explains that the price of a stock will always be reflected from the information available in the market or investors tend to be rational. However, dramatic events such as COVID-19 allow investors to overreact. The results showed that there was an overreaction in both winner and loser stocks in the LQ 45 group on the IDX in 3 months of observation since covid was announced as a pandemic. This overreaction is then followed by a price reversal even though it has not given a significant return after t+13 for both winner and losser stocks. The speed of price recovery (magnitude effect) after the price reversal on the loser stock is higher (faster) than the winner stock. The speed of this price recovery is significantly affected by the company's capital structure and share ownership of individual investors (local and foreign).

Contrarian Profits in Thailand Sustainability Investment-Listed versus in Stock Exchange of Thailand-Listed Companies

In contrarian trading, investors buy and sell loser stocks (lowest average historical prices) and winner stocks (highest average historical prices), respectively. This study examines whether (a) Thailand Sustainability Investment-listed companies outperform Stock Exchange of Thailand (SET)-listed companies (from 1 January 2016 to 31 December 2019) in contrarian profits, (b) the five-factor model outperforms their 1993 three-factor model in explaining contrarian profits, and (c) risk drives the earnings of contrarians. Companies were divided into portfolios of winners and losers based on the average of the daily historical prices held in various eras. The SET-listed companies perform better in generating profits. The root mean squared error and mean absolute error—measurements of model accuracy—report that the error from the three-factor model is smaller than the one from the five-factor model. Thus, the three-factor model is applied to estimate the risk-adjusted return. Zero contrarian profits after risk adjustment confirms that they are risk-driven.

Nonlinear Effects of Temperature on Returns and Investor Optimism–Pessimism from Winner and Loser Stocks

Contrary to findings from prior empirical studies, which show that temperature affects stock returns linearly, we find that the relation of temperature with stock returns is nonlinear. The results show that investors got higher returns under both extremely hot and cold temperatures than under comfortable temperatures. More specifically, we find that hot temperatures led to higher returns only for investors from warm-climate countries with a tropical or subtropical climate. In contrast, cold temperatures led to higher returns only for investors from cool-climate countries with a temperate or polar climate. With further investigation, we found that such hot-temperature effects on returns in warm-climate countries are enhanced when the investor is optimistic about the stock market due to having recently invested in winner stocks. Conversely, the cold temperature effect on returns in cool-climate countries is strengthened when the investor is pessimistic due to having recently invested in loser stocks.

Investor Attention and Option Returns

This paper examines the attention effect in the options market. We show that option investors (especially retail investors) buy more calls and puts on both daily winner and loser stocks, and this buying pressure leads to an overvaluation, as shown in subsequent lower hedged returns. The overvaluation is due to a combination of differences of opinion, risk aversion, and margin requirements. The economic magnitude is large. For instance, a zero-financing portfolio involving options on loser stocks renders an alpha of 2.90% per month. Aside from contributing to the broad literature of investor attention versus asset returns, our study also sheds light on an important yet largely neglected topic: the impact of margins on option trading and pricing. This paper was accepted by Lukas Schmid, finance. Funding: Financial support from King’s College London, the University of Toronto, and the Social Sciences and Humanities Research Council of Canada [Grant 435-2018-0514] is gratefully acknowledged. Supplemental Material: Data and the internet appendices are available at https://doi.org/10.1287/mnsc.2022.4557 .

Do oil price shocks have any implications for stock return momentum?

The study examines the implications of structural oil price shocks on one of the most widely observed and pervasive momentum anomalies. We use a structural vector autoregression (SVAR) model to find the time-varying responses of momentum payoffs of India, Japan, the UK, and the US to different structural oil shocks—oil supply global aggregate demand shock, speculative shock, and other oil demand shocks. Structural oil shocks, particularly oil demand and speculative shocks, have important implications as conditioning information in predicting stock return momentum behavior according to the conditional asset pricing model. Overall, the results indicate that structural oil shocks have a significant impact on small cap and loser stock portfolios. Our findings have crucial implications to develop effective momentum investment strategies that consider structural oil shocks as conditioning information.

Dispotition Effect And Momentum

Background - An important challenge for behavioral finance is to find a direct relationship between the behavior of individual investors and asset price dynamics. One of irrational investors are most conspicuous in the financial markets is the tendency of some investors to sell winner stocks too early and keep losers stocks too long, called the disposition effect. Disposition effect can trigger a momentum in the stock price. Aim - To examine the past returns and disposition effect in predicting the momentum of stock returns. Desaign / methodology / approach - The data used in this study is weekly data. This study uses a variable capital gain overhang as a proxy disposition effect. Other variables used in this study is the stock return short, medium, and long period, turnover short, medium, and long period, and market capitalization. The analytical method used is regression and different test. Results and Discussion - Simultaneous test results also show that the variables of short period return, medium period return, long period return, short period turnover, medium period turnover, long period turnover, and market capitalization together have an effect on the capital gain overhang variable. The adjusted R2 value in this model shows that the independent variable in this equation is able to explain the dependent variable of 35.1%. Stocks with a low capital gain overhang (G1), have a low return value as well. Likewise, stocks with high capital gain overhangs (G4), have high return values. The disposition effect is an important cause of momentum, stocks with high capital gain overhangs will have positive returns. From these results, it can be concluded that hypothesis 2 is supported, namely the disposition effect can predict the presence of momentum in stock returns. Conclussion - The results showed past returns can predict the momentum in stock returns and disposition effect could predict the momentum of stock return. Research Implication –This research can provide an overview of the anomalies that often occur in the capital market, particularly the existence of the disposition effect and momentum in the Indonesian capital market. Limitations – This research uses only one proxy, namely the capital gain overhang as a proxy for the disposition effect which was first developed by the research of Grinblatt and Han (2005) and there are no other proxies that can be used to compare research results

Analysis of the Sectoral Stock Price Index on the IDX during the Covid-19

In this study, we want to measure the performance of the average monthly return of sectoral stock indexes in Indonesia by using the composite index (JCI) as a comparison. We want to find the winner, loser, and neutral stock indexes. We use monthly data from March 2020 to February 2021, namely the sectors: agriculture, mining, essential industry, various industries, consumption, property, infrastructure, finance, and trade. We use panel data analysis from the event study to achieve the research objectives, a combination of cross-section data and time-series data. The research results showed six sectors of the stock index as winners: agriculture, mining, essential industry, infrastructure, finance, and trade. There are three loser stock index sectors: the miscellaneous sector, consumption, and property.

How Well is the Implementation of CAPM in Condition of Market Anomaly? Case in Market Overreaction Anomaly at Indonesia Stock Exchange

This study aims to test the occured of the market anomaly, iemarket overreactions in Indonesian stock market at the Covid-19 pandemic. If the event occurs then be tested whether a contrarian investment strategy is relevant to be implemented. It will also be tested whether the CAPM's market risk factor will affect the returns. The data from the Indonesia Stock Exchange (IDX) used are the stock price in periods of January 2019-December 2020, which during the pandemic were have the potential to be profitable or detrimental. Through the formation of the portfolios that called as as the winner and the losers, testing of returns reversals could be done to prove the occurs of the market overreaction. The results of this research are as follows: First, markets overreaction anomaly event has occured in Indonesian stock market in periods of Covid-19 pandemic. The reversal of return occurs for most shares those have the potential to be profitable or detrimental, or have been proven those it profits rates has increased or decreased in the periods of the pandemic. Second, the contrarian strategy is relevant to be implemented in the short term in Indonesian stock market, which is in this pandemic. By implementing the contrarian strategy, a profitable return is obtained from the difference between the returns of the losers and the winners through their each of observation period. Third, market risk factors based on the CAPM have a significant effect only for the losers stocks.

On Survivor Stocks in the S&P 500 Stock Index

This paper investigates the performance and characteristics of survivor stocks in the S&P 500 index. Using both in-sample and out-of-sample comparisons, survivor stocks outperformed this market index by a considerable margin. Relative to other S&P 500 index companies, survivor stocks tend to be small-value stocks that exhibit high profitability and invest conservatively. Surprisingly, survivor stocks tend to be loser stocks with negative exposure to the momentum factor. Further analyses show that the volatility of the survivor stocks portfolio is less exposed to tail risks and responds less to shocks in the innovation process.

The Portfolio Composition Effect

Does the evaluation of a portfolio of stocks depend on its composition of winner and loser stocks? To test this, we define a simple, counting-based measure of performance - the number of winner relative to the number of loser stocks in a portfolio - and examine how this composition measure affects individuals' willingness to invest in a portfolio. We derive testable predictions for the proposed composition measure from a framework which combines category-based thinking with mental accounting. Consistent with our predictions, we find across all experiments that individuals allocate larger investments to portfolios with more winner than loser stocks relative to alternative portfolios with more loser than winner stocks, although both portfolios (1) have realized identical overall portfolio returns and (2) show identical expected risk-return characteristics. Building on our experimental findings, we analyze fund flows of exchange-traded funds on leading equity market indices. We identify that the proposed portfolio composition measure is positively related to future net fund flows.