Loser Stocks Research Articles

Overreaction and the Cross-Section of Returns: International Evidence

Theory has linked price momentum with price reversals (Barberis, Shleifer, and Vishny (1998), Daniel, Hirshleifer, and Subrahmanyam (1998), and Hong and Stein (1999)). The models generally rely on behavioral descriptions of irrational investors who push prices beyond their fundamental value thus leading to an inevitable price reversal. While significant empirical evidence has shown the presence of momentum in global equity returns, there have been no large-scale global studies of the subsequent long-term price reversals. We study returns from twenty-three developed countries categorized into the regions of North America, Europe, Japan, and Asia, over 1993-2014 and find evidence supporting the global presence of long-term price reversal. The positive return differential between loser stocks over the past three years and winner stocks over the past three years is economically and statistically significant. Results from independent double sorts and from Fama-MacBeth regressions show that long-term reversals remains significant after controlling for size, book-to-market equity, and momentum.

An Analysis of Investment Strategies and Excess Returns in the China (Shanghai) Stock Market

The purpose of this paper is to understand the linkages between excess returns and four investment strategies - value, momentum, size, and liquidity - for the China stock market during the period 2003-2015, by applying the methodology proposed by Jegadeesh and Titman (2001) and Hart et al. (2003) and using data obtained from the Shanghai stock exchange (SSE) and Taiwan Economic Journal (TEJ). The empirical results suggest that a value strategy such as book to market value (B/M) ratio, as well as momentum, liquidity, and size strategies can all help investors make better judgments, in contrast to a strategy based on the price-earnings (P/E) ratio that does not help when investing in the China stock market. Moreover, we recommend that investors who want to make a significant profit in the China stock market should refer to momentum strategies and buy winner stocks and sell loser stocks.

Growth options, dividend payout ratios and stock returns

Purpose This paper aims to examine the impact of the dividend payout ratio on future stock returns and momentum strategies. Design/methodology/approach The author uses the portfolio sorting approach used in the momentum literature to examine this impact. Findings First, the author shows that the returns for the winner stocks tend to be the largest if no dividends are paid and then decrease with the dividend payout ratio; the returns for the loser stocks tend to have an inverted U-shaped relationship with the dividend payout ratio, but the zero-dividend loser stocks have the smallest return; and the returns for the stocks between the winners and the losers tend to remain similar, regardless of the dividend payout ratio. Second, the author shows that momentum profit is the largest for the stocks that do not make dividend payment but appear similar for the stocks that pay dividends. The author's empirical findings imply that stock price momentum is a function of the dividend payout ratio, growth stock momentum tends to be much stronger than value stock momentum and no-dividend stock momentum beats dividend stock momentum. In fact, when the dividend payout ratio is considered, momentum profit can be improved by up to 63 per cent. Originality/value This paper is the first one to examine the impact of dividend payout ratios on future stock returns and momentum profit, and it obtained many interesting empirical results. In addition, unlike most studies in the momentum literature that use behavioral theory to explain empirical findings, this paper uses the growth option idea to present a rational explanation for the empirical results in this paper.

The Role of Industry Effects in Simultaneous Reversal and Momentum Patterns in One-Month Stock Returns

ABSTRACTWhen stocks are ranked by returns in one month, the portfolio of loser stocks tends to outperform the portfolio of winner stocks in the subsequent month. Yet industry portfolios tend to display momentum. We develop a model of information diffusion among agents with constrained information processing ability that reconciles these well-documented phenomena. We test whether this model or the overreaction hypothesis is consistent with the data. Additionally, a trading strategy based on the model outperforms strategies based on overreaction and on industry momentum. The strategy produces abnormal returns while controlling for market–risk and the size, book value, January, momentum, and liquidity effects.

Investigating the excess return of contrarian strategy in the active insurance firms in Tehran Stock Exchange

Obtaining the appropriate rate of return is the most important expectation of investors in the investment process and different statategies have been used by investors to gain a required rate of return. Contrarian strategy is one the strategies used recently to predict the return of stock using the historical information. Contrarian strategy suggests that an excess return can be gained by selling winners stock and buying losers stock. This study examines the excess return of contrarian strategy in the active insurance firms in Tehran Stock Exchange. For this purpose, data of five insurance firms activated from 2007 to 2011 has been collected and analyzed. The variables in this stuey are return of contrarian strategy indaily, monthly and seasonal courses. Data analysis and hypotheses testing include Philips model and AVOVA and T-test statistic has been used to examine the significance of test and the confidence level. The results of study shows that the return of contrarian stratgiey is effective in daily, monthly and seasonal courses. Keywords : Excess Return, Contrarian Strategy, Insurance Firms, Winner Stock, Loser Stock

Overreaction and the cross-section of returns: International evidence

Abstract A number of theories have linked price momentum with price reversals. While significant empirical evidence has shown the presence of momentum in global equity returns, there have been no large-scale global studies of the subsequent long-term price reversal. We study returns from twenty-three developed countries categorized into the regions of North America, Europe, Japan, and Asia, over 1993–2014 and find evidence supporting the global presence of long-term price reversals. The positive return differential between loser stocks over the past three years and winner stocks over the past three years is economically and statistically significant. Results from independent double sorts and from Fama-MacBeth regressions show that long-term reversals remain significant after controlling for size, book-to-market equity, and momentum.

Underreaction to News in the US Stock Market

Using a score that quantifies the tone of news articles, I construct a weekly measure of qualitative information that predicts returns over the next 13 weeks. A portfolio long stocks with past positive tone and short stocks with past negative tone has an average return of 16.54 basis points per week (8.60% per year). The findings suggest the market underreacts to the content of news articles. The underreaction is not constrained to small stocks, low analyst-coverage stocks, low institutional ownership, or loser stocks. The findings also suggest the tone of news articles is different from sentiment which is assumed to have no permanent impact on stock prices.

Irrational Mutual Fund Managers: Explaining Differences in Their Behavior

ABSTRACTDocumenting the disposition effect for a large sample of mutual fund managers in the United States, we find that stock-level characteristics explain the cross-sectional variation of the effect. The disposition effect, which is the tendency to sell winner stocks too early and hold on to loser stocks for too long, is more pronounced for fund managers who invest in stocks that are more difficult to value. Using different measures of stock and market uncertainty, we show that mutual fund managers display a stronger disposition-driven behavior when stocks are more difficult to value. We also find that the level of the disposition effect is monotonically increasing with the level of systematic risk (i.e., beta). In addition, we document that the trading behavior of mutual fund managers is partly driven by attention-grabbing stocks (dividend-paying stocks). Overall, our results suggest that stock-level uncertainty and trading of attention-grabbing stocks amplify the disposition effect and that differences in the effect can be explained by mutual fund managers' investment styles. Given that mutual funds hold a large fraction of the U.S. equity market, our findings add to the ongoing discussion whether professional investors can create stock mispricings and shed new light on market efficiency.

The impact of the ECB's conventional and unconventional monetary policies on stock markets

Using an event study method, we examine how stock markets respond to the policies of the European Central Bank during 1999–2015. We use market prices of futures (government bonds) to identify surprises in (un)conventional monetary policy. Our results suggest that especially unconventional monetary policy surprises affect the EURO STOXX 50 index. We also find evidence for the credit channel, notably for unconventional monetary policy surprises. Our results also suggest that value and past loser stocks show a larger reaction to monetary policy surprises. These results are confirmed if identification of monetary policy surprises is based on the Rigobon–Sack heteroscedasticity approach.

Which stocks drive the size, value, and momentum anomalies and for how long? Evidence from a statistical leverage analysis

Abstract A large number of neoclassical, behavioral, and bias-based theories try to explain the tendency of small, value, and winner stocks to outperform big, growth, and loser stocks, three well-known characteristic anomalies. Because the theories often predict similar relationships between a stock’s propensity to contribute to the anomalies and a set of correlated firm characteristics, existing studies focusing on single theories do not tell us which theory is most successful in explaining the anomalies. To fill this gap, we use a new non-parametric methodology to run a horse race between the theories. In the first step, we use statistical leverage analysis to find out which stocks are ultimately responsible for the anomalies. In the second, we use the firm characteristics suggested by the theories to forecast the identity of the anomaly drivers, with the purpose of determining which theory is most supported by the data. We find that behavioral theories are most convincing in explaining the size and book-to-market anomalies, while no theory is convincing in explaining the momentum anomaly.

Momentum profits, market cycles, and rebounds: Evidence from Germany

Abstract Recent evidence shows that U.S. price momentum strategies suffer tremendous losses in times of highly volatile market recoveries. We extend the existing literature by analyzing the performance of both price and earnings momentum portfolios across different market states. For our German sample, we find that the long–short price momentum strategy loses almost 9% per month during market rebounds. This so-called momentum crash is solely due to recovering loser stocks. After a prolonged bear market hits bottom, the loser portfolio is mostly composed of highly volatile and leveraged small-cap stocks, which have lost nearly 83% of their market value over the preceding year and are thus susceptible to heavy rebounds. Interestingly, the momentum crash phenomenon seems to disappear once we control for exposures to the Fama–French factors, with the market factor being the most relevant. By contrast, earnings momentum strategies are less affected by market rebounds and also consistently outperform price momentum strategies on a risk-adjusted basis.

Adding value to value stocks in Indian stock market: an empirical analysis

Purpose– The purpose of this study is to examine the relevance of an accounting-based fundamental strategy in adding value to value stocks in Indian stock market. The fundamentals-based investment strategy “F-score”, given by Joseph Piotroski, has been used on stocks having high book-to-market ratio to eliminate the firms with poor future prospects from the entire portfolio of value stocks.Design/methodology/approach– The market adjusted performance of all the firms in the sample is examined using one samplet-test. Further, F-score of all the firms in the sample is calculated and the independent samplet-test has been used to examine the significance of mean difference between high-score and low-score firms. Finally, the predictive ability of F-score in explaining the overall stock returns is examined using panel data regression analysis.Findings– Results reveal that the mean market-adjusted return of stocks, meeting all constructs of F-score is significantly larger than the entire portfolio of value stocks by 18.402 per cent annually across the period of study. The results of panel data regression made it evident that one-point improvement in aggregate F-score is associated with an about 4.93 per cent increase in one-year market-adjusted return.Practical implications– The significant mean return difference found between the high-F-score firms and the low-score firms suggests that an investor could constitute a hedge portfolio that generates positive return by selling expected losers stocks and buying expected winners.Originality/value– The present study is the first attempt made in emerging economy like India to enrich the literature on value investing strategies by examining the performance of F-score strategy to separate winners from losers in Indian stock market.

한국 주식시장에서의 융합적 모멘텀 투자전략

This study attempts to empirically investigate if relative momentum strategy is effective in the Korean stock market. The sample of the study is comprised of companies which are traded in both Kospi and Kosdaq stock markets in Korea for the period between 2001~2014. The study observes that the momentum strategy buying past winner stocks and selling past loser stocks is negatively correlated with the value strategy buying value stocks with high book to market ratio and selling glamour stocks with low book to market ratio. And each strategy is alternatively effective from period to period. The study demonstrates that the momentum strategy is effective when both strategies which are negatively correlated are treated as one system by estimating Fama and French`s[1] 3 factor regression model.

Market Proxies as Factors in Linear Asset Pricing Models: Still Living with the Roll Critique (Extended Version)

A new model misspecification measure for linear asset pricing models is proposed. The origins of this measure are in Shanken (1987) and Kandel and Stambaugh (1985, 1995), where it is argued that the true market return is inherently latent and, as a consequence, only ever partially observed. Tests of asset pricing models that rely on the market return as a risk factor and are based, by necessity, on an observable proxy to this factor are then misspecified. The proposed misspecification measure, which assigns an upper bound to the correlation between the true market return and the observable proxy return used to conduct the test, can be estimated entirely and directly from observable data. This measure is suited both for testing models that include the market return as a pricing factor in a traditional sense (i.e., determining whether the given model does or does not price a collection of risky assets) and ranking those models (i.e., gauging which model performs the best). The measure is used to price portfolios reflecting the size, value, and momentum premiums. While neither the conditional CAPM nor the ICAPM is shown to offer any improvement over the simple CAPM, all three models are shown to perform materially better under the proposed measure, with improvements in model fit of as much as 45%. Also, it is discovered that winner stocks in a momentum portfolio may have higher market betas than loser stocks.

Asm: Stata Program to Construct J-K Overlapping Momentum Portfolios

In this technical report, I show how to use asm – a Stata program to construct J-K overlapping momentum portfolios. Also, I outline details of the primary functions/ features of the program. The methods used in this program for constructing momentum portfolios are generally in line with Jegadesh and Titman (1993). However, the program offers additional features that were suggested/used in more recent papers. For example, (i) the program offers to calculate one-period as well as n-periods cumulative holding periods returns; (ii) construct portfolios on the basis of winners and losers stocks that can be defined using any deciles of their past returns; (iii) construct momentum portfolios using daily, weekly, or monthly frequencies; (iv) skip user’s specified n-periods between formation and holding periods to control for bid-ask spread or non-synchronous trading and (v) perform t-tests on the holding period returns.

Stock Overreaction to Extreme Market Events

In this paper we find that stocks overreact to both positive and negative extreme daily movements of the broader market, but more intensely in the latter case. The overreaction is even more pronounced when the market exhibits clustered extreme swings, indicating that the overreaction is related to market volatility. Indeed, a contrarian investment strategy earns a significant Fama-French daily alpha of 0.34% (85.68% annualized) with a Sharpe ratio of 5.23 in highly volatile circumstances. Stock overreaction appears to be driven by the loser stocks that revert more strongly, even as they exhibit a lower market beta than the winners.

How Do Stocks React to Extreme Market Events? Evidence from Brazil

This paper studies the short-term (21 trading days) behavior of Brazilian stocks in the event of extreme movements in the Brazilian market index. Using cumulative abnormal returns of contrarian and momentum strategies, we find that stocks tend to overreact after negative events while they exhibit normal reaction after positive shocks. This overreaction, however, is particularly intense when the broad market experience clustered extreme swings within the 21 days window, meaning that the short-term overreaction is correlated to market volatility. In these circumstances we find that the profit of the contrarian strategy is driven by the performance of the winner stocks despite a lower contemporaneous beta than the loser stocks.

Market proxies as factors in linear asset pricing models: Still living with the roll critique

Abstract A new model misspecification measure for linear asset pricing models is proposed for the case where misspecification maps to latency of one of the pricing factors; in this case, the market return. This measure is suited both for testing models that include the market return as a pricing factor in a traditional sense (i.e., whether the chosen model does or does not price a collection of risky assets) and ranking those models (i.e., determining which model performs best). The proposed measure is used in pricing portfolios reflecting the size, value, and momentum premia. The conditional CAPM of Jagannathan and Wang (1996) is found to best the performance of both the simple CAPM and the ICAPM of Petkova (2006). Moreover, it is discovered that winner stocks in a momentum portfolio may have higher market betas than loser stocks.

CAN MOMENTUM PORTFOLIOS EARN MORE IN THE KARACHI STOCK EXCHANGE

In this study, we attempt to show empirical evidence of momentum profits in Karachi Stock Exchange (KSE) using monthly stocks returns data of 609 stocks over the period June 2004 to March 2014. Using Jegadeesh and Titman (1993) methodology, we find that investors can earn positive returns by holding a zero-investment momentum portfolio i.e. buying past winners stocks and selling past losers stocks. These results are robust to excluding small stocks (share price< PKR 5) as well as to using different sample periods. Further research in this area might consider factors such as risk, size, liquidity, book-to-market value, transaction costs, and trading volume to see which of these factors can explain momentum profits in KSE.

Market volatility and momentum

Abstract We investigate the predictive power of market volatility for momentum. We find that (1) market volatility has significant power to forecast momentum payoffs, which is robust after controlling for market state and business cycle variables; (2) market volatility absorbs much of the predictive power of market state; (3) after controlling for market volatility and market state, other variables do not have incremental predictive power; (4) the time-series predictive power of market volatility is centered on loser stocks; and (5) default probability helps explain the predictive power of market volatility for momentum. These findings jointly present a significant challenge to existing theories on momentum.