Past Winners Research Articles

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.

Best Ideas of Hedge Funds

We provide new compelling evidence that hedge funds possess investment skill. Using the longest-in-literature unbiased sample of hedge funds, we show that large holdings of past winners earn 7% annual benchmark-adjusted return. This remarkable performance is consistent with the notion that large holdings represent managers' best ideas. Our sample goes back to 1980 and does not miss non-surviving hedge funds, or those that do not voluntarily report to commercial databases. It consists of all investment managers that must report to the SEC, except those that we identify as managers other than hedge funds. While publicly available data is not sufficient to identify hedge funds directly, our reverse identification method achieves both high sensitivity and specificity. We also find weaker yet significant evidence of investment skill in standard indicators such as average fund performance and performance persistence.

The Crash Risks of Style Investing: Can They Be Internationally Diversified?

Motivated by the growth in the popularity of style investing and the concern for extreme events among investors, we examine the tail risks of style investing in different countries. For the G7 countries over the 1981-2010 period, we evaluate whether portfolios with different size, value, or momentum tilts — the SMB (small minus big), HML (high minus low), and UMD (past winners minus past losers) portfolios — experience different crash risks, and whether these risks can be mitigated through international diversification. We find that the crash risks of momentum tend to be higher than those of size and value, where crash risks are measured by return skewness and expected shortfall. International diversification lowers the crash risks of size and value further, but has only limited effects on momentum. Specifically, a diversified, world UMD portfolio (equal-weighted portfolio of the G7 countries) tends to be more left-skewed and has a more negative expected shortfall than the momentum portfolios of individual countries. By contrast, the world SMB and HML portfolios tend to have less negative skewness and expected shortfall than their country-specific counterparts. By examining the conditional correlations and return coexceedances of style portfolios across countries, we find that the extreme negative returns on UMD in different markets tend to occur together, whereas those on SMB and HML tend to be country-specific. In fact, for SMB and HML, it is the right-tail events that tend to be more global in nature. These results suggest that the difference in the effect of international diversification is due to the left (right) tails of momentum (size and value) portfolios being more correlated than their right (left) tails across countries.

A Study of Overreaction Hypothesis in the Indian Equity Market

The purpose of this study is to examine the overreaction hypothesis in the Indian stock market during the period 1990 to 2012. It also explores whether this overreaction hypothesis is the manifestation of earlier anomalies such as size effect and value effect. The stock price and fundamental data of 1,427 Indian firms listed on the Bombay Stock Exchange during the period 1990 to 2012 have been used. Time series regression and CAPM have been applied to test overreaction, size and value effects. The empirical results suggest that past losers have a tendency to outperform past winners for longer investment periods such as two to three years. Although lower in magnitude, yet this superior performance of loser stocks is economically significant in the Indian equity market. The empirical results do not reveal any calendar anomaly in the superior performance of loser stocks. Furthermore, the results indicate that losers tended to be small and value stocks and that the limited overreaction effects documented are probably attributable to the size and value effect in the Indian equity market during the last two decades. The findings may provide a base for investment managers and investors to reallocate their portfolio weights to small and value stocks. Earlier studies in the Indian context were primarily focused only on the overreaction hypothesis and to cover this research gap, a further dig has been made to uproot the possibility of size effect, value effect and seasonality in overreaction effects. A fairly large sample (1,427 firms) has been used as compared to previous studies.

Global Political Risks in the Currency Market

Using a measure of global political risk, relative to the U.S., that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, i.e., the past winners, and exploit the lower returns of loser portfolios.

Bibliometric indices and academic promotion within plastic surgery.

Bibliometric indices are proposed measures to quantitatively and qualitatively evaluate scholarly output within academic medicine. The authors sought to validate bibliometric indices as an indicator of academic productivity within plastic surgery and their association with promotion of faculty surgeons in academic practice. The authors examined faculty members (n=127) from the 10 accredited plastic surgery training institutions with the most graduates currently in academic practice. As a measure of content validity, the authors included past winners of the American Association of Plastic Surgeons Research Achievement Award (n=8). Individual bibliometric indices, including h-index, contemporary h-index, and g-index, were calculated. An h-index of 10 indicates that a surgeon has 10 publications with at least 10 citations per article. Cutoff values for academic promotion were calculated using receiver operating characteristic curves. Bibliometric indices, including h-index, g-index, contemporary h-index, and number of peer-reviewed publications, increased with academic rank and were highest among American Association of Plastic Surgeons Research Achievement Award winners. Cutoffs for promotion to associate and professor ranks were as follows: h-index, 8.5 and 14.5; g-index, 14.5 and 27.5; contemporary h-index, 5.5 and 9.5; and number of publications, 29.5 and 48, respectively. After controlling for fellowship training and advanced degrees, h-index was most strongly correlated with promotion to associate (OR, 1.20; 95% CI, 1.10 to 1.32) and full professor (OR, 1.17; 95% CI, 1.06 to 1.29). Total number of publications was least predictive of promotion. Bibliometric indices predict promotion in academic surgery and provide a useful metric for surgeons embarking on a career in academia.

People like me are never promoted! Plurality in hierarchical tournaments for promotion and compensation

A central tenet of tournament theory is that interhierarchical pay dispersion promotes effort and performance among employees—regardless of who ends up winning the tournament—because all employees seek to win and thereby receive the large pay raise. However, drawing from social identity theory, we propose that plurality in labor pools has important implications for tournament theory. Specifically, we posit that the performance benefits from interhierarchical pay dispersion are especially large when employees perceive previous promotees as similar to themselves, but minimal when they perceive dissimilarity. Dissimilarity to past tournament winners reduces the perceived probability of success and enhances the perception of injustice in response to interhierarchical pay dispersion, resulting in reduced performance and increased organizational deviance and turnover. Moreover, the influence of perceived demographic similarity on tournament effectiveness is strengthened by social creativity strategies and identity salience but weakened by social mobility strategies. Thus, in some contexts, interhierarchical pay dispersion will not only fail to promote performance, but will backfire and instead promote negative outcomes.

The principal–agent problem, tracking error, and the optimal investment portfolio

The principal seeks a portfolio manager to manage funds. The principal uses a tracking-error constraint that restricts the portfolio’s volatility. Without the constraint, the manager may increase the portfolio return by adding high-variance assets. Tests assume that the benchmark is the value-weighted market portfolio less the risk-free rate (MKT). Tests then add the Fama and French four long–short portfolios to test if they can increase return without a large increase in the portfolio variance. SMB (Small Minus Big) is long in small stocks and short in big stocks and picks up the small-firm premium. HML (High Minus Low) is long in high book-to-market stocks and short in low book-to-market stocks and picks up the value premium. WML (Winners Minus Losers) is long in past winners and short in past losers and picks up the momentum premium. Tests find that SMB adds tracking error and small returns, HML adds tracking error and large returns, and WML adds modest tracking error and large returns. WML requires heavy trading. Net of trade costs, the WML gain disappears. However, the trade execution costs to hold HML are modest. Net of trade costs, we see a gain from adding HML to MKT.

The Momentum Gap and Return Predictability

Momentum strategies have historically delivered large alphas, yet they also displayed significant time-variation that is not very well understood. I document that expected momentum profits vary negatively with the formation period return difference between past winners and losers, which I term the momentum gap. A one standard deviation increase in the momentum gap predicts a 1.29% decrease in the monthly momentum return after controlling for existing predictors. I find consistent results across 21 international stock markets. Following the simple real-time strategy of investing in momentum only when the momentum gap is below the 80th percentile generates monthly returns of 1.28%.

Overreaction evidence from large-cap stocks

Purpose – The purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers’ gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed. Design/methodology/approach – Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart’s (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy. Findings – The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios’ alphas are significant, suggesting that the CAPM and the multifactor models are unable to explain return differentials between winners and losers. Our evidence supports two main conclusions. First, stock market overreaction still holds for a sample of large firms. Second, this is robust to the Fama and French’s (1993, 1996) three-factor model and Carhart’s (1997) momentum portfolio. Findings emphasize the relevance of a contrarian strategy when rebalancing investment portfolios. Practical implications – Portfolio managers can improve stock returns by selling past winners and buying previous loser large-cap US stocks. Originality/value – This paper is the first, to the authors’ knowledge, to examine frequently traded large-cap US stocks to avoid infrequent trading and size concerns.

Herding of institutional investors and margin traders on extreme market movements

This paper investigates the herding tendency of foreign and domestic institutional investors and margin traders from different herding perspectives by using daily buy and sell data in Taiwan's stock market. Strong evidence indicates that herding phenomenon is closely associated with market conditions, traders' types and firm characteristics. Trading behaviors of institutional investors and margin traders are affected by their own past trades but their trading patterns change when facing large price drops. Margin traders and institutional investors have the tendency to sell past losers upon large market price declines and buy past winners upon large market price rises.

Momentum in Irish stocks: evidence from the credit crisis

This article examines return momentum in Irish shares over a 24-year period, including the recent credit crisis. The optimal momentum strategy generates significant risk-adjusted abnormal returns that are robust to the return generating model and seasonal effects. The extent of underreaction is more symmetrical than previous research has indicated, with both past winners and losers contributing to momentum returns. Momentum is found to be significantly higher in the pre-credit crisis period. The source of the positive returns in the momentum strategy changes from the winner portfolio to the loser portfolio as we move into the credit crisis, with this latter period showing positive but insignificant moment returns.

Asymmetric Risks of Momentum Strategies

I provide a novel risk-based explanation for the profitability of momentum strategies. I show that the past winners and the past losers are differently exposed to the upside and downside market risks. Winners systematically have higher relative downside market betas and lower relative upside market betas than losers. As a result, the winner-minus-loser momentum portfolios are exposed to extra downside market risk, but hedge against the upside market risk. Such asymmetry in the upside and downside risks is a mechanical consequence of rebalancing momentum portfolios. But it is unattractive for an investor because both positive relative downside betas and negative relative upside betas carry positive risk premiums according to the Downside-Risk CAPM. Hence, the high returns to momentum strategies are a mere compensation for their upside and downside risks. The Downside Risk-CAPM is a robust unifying explanation of returns to momentum portfolios, constructed for different geographical and asset markets, and it outperforms alternative multi-factor models.

Stock return reversal and continuance anomaly: new evidence from Hong Kong

Using weekly data, this article conducts a comprehensive analysis and presents new empirical evidences on the short-term stock return reversal and continuance anomaly in the Hong Kong stock market. We confirm that winner stocks behave differently from loser stocks in that the return reversal phenomenon is pervasive within past winner stocks only while past loser stocks tend to show weak return continuance. The arbitrage strategy can earn significantly positive contrarian profits, especially for small firms and illiquid stocks. The anomaly varies across different industries and is also sensitive to the market movement. Despite the existence of the anomaly, our results still in general suggest that the Hong Kong stock market is weak-form efficient because arbitrage trading costs would largely overwhelm the available profits in most cases.

Fooled by Randomness: Investor Perception of Fund Manager Skill

Return-chasing investors almost exclusively consider top-performing funds for their investment decisions. When drawing conclusions about the managerial skill of these top performers, they tend to neglect fund volatility and the cross-sectional information contained in the number of funds and the distribution of skill. In multiple surveys of sophisticated retail investors, we show that they do not fully understand the role of chance in experimental samples of fund populations. Respondents evaluate each fund in isolation and do not sufficiently account for fund volatility. They confuse risk taking with manager skill and are thus likely to over-allocate capital to lucky past winners.

A Theory for Market Growth or Decline

Market growth is fundamental to marketing. Frank Bass's seminal diffusion theory explains growth in new product markets. We develop an analogous theory for established markets exhibiting sporadic growth or intermittent declines. Our theory suggests that market participants repeatedly take successful and unsuccessful actions that cause them to change or to mutate in myriad and often unpredictable ways. The environment sorts these mutations, determining winners and losers. Abundant mutations often cause different market participants to become winners, displacing past winners. Abundant mutations also often cause market growth because the natural selection mechanism leaves more surviving favorable mutations. So one nonobvious falsifiable implication of our theory is that displacement precedes growth and stability precedes decline. Another is that risk taking, diversity of opinions, and experimentation should precede growth. We develop a metric for measuring displacement. Using multiple publicly available data sets (one including sales for top firms for 55 years and another including sales for all automobile models for 25 years), we find that our metric provides a practical way to measure the rate of mutation and confirm our theory's predictions. Our easily replicated tests show that our displacement metric can predict intermittent market growth or decline in very different contexts without the need for exogenous idiosyncratic explanations. Moreover, other alternative covariates (trends, lagged growth, new product entry, macroeconomic indicators, etc.) are unable to predict growth or decline.

50 years of the Colworth Medal

The Colworth Medal is an esteemed annual award for outstanding research by a young biochemist of any nationality who has carried out the majority of his or her work in the UK or the Republic of Ireland. Donated in 1963 by Unilever Research Colworth Laboratory, the award is made to a scientist who is 35 years of age or under, at the time of the award's nomination deadline. Interviews with past winners, carried out by Mark Burgess, will appear in The Biochemist throughout 2013; in this issue, the 2010s.

Off the Golden Fetters: Examining Interwar Carry Trade and Momentum

We study the properties of carry trade and momentum returns in the interwar period, 1921:1-1936:12. We find that currencies with higher interest rates outperform currencies with lower interest rates by about 7% per annum, consistent with estimates from modern samples, while a momentum strategy that is long past winner and short past loser currencies rewards an average annual excess return of around 7% in the interwar sample, larger than its modern counterparts. On the grounds that the interwar period represents rare events better than modern samples, we provide evidence unfavorable to the rare disaster based explanation for the returns to the carry trade and momentum. Global FX volatility risk, however, turns out to account for the carry trade return in the interwar sample as well as in modern samples.

Managing Depression in Multiple Sclerosis: prevalence, Pathology and Progress

Dr Arnett received his PhD in Psychology (Clinical) from the University of Wisconsin – Madison (WI, USA), and completed a postdoctoral fellowship in Clinical Neuropsychology at the Medical College of Wisconsin. He is currently a psychology professor and Director of Clinical Training at Penn State University (PA, USA). Dr Arnett’s research focuses on clinical neuropsychology, with an emphasis on secondary influences on cognitive functioning in persons with multiple sclerosis and mild traumatic brain injury. He is the director of the Neuropsychology of Sports-Related Concussion and Multiple Sclerosis programs at Penn State University, a fellow of the National Academy of Neuropsychology (NAN), past winner of NAN’s Nelson Butters Award for Research Contributions to Clinical Neuropsychology, and was Program Co-Chair for the 2010 Mid-Year Meeting of the International Neuropsychological Society (INS). He has authored over 90 research articles and book chapters, as well as over 160 conference presentations. He is an editorial board member of several journals, including Neuropsychology, Journal of the International Neuropsychological Society and Archives of Clinical Neuropsychology. Dede Ukueberuwa received her bachelor’s degree from Princeton University (NJ, USA) and earned a master’s degree in Psychology at Penn State University (PA, USA), where she is currently a PhD student in Clinical Psychology. She is also the coordinator of the Penn State University Multiple Sclerosis Project. Her work uses neuropsychological testing and neuroimaging to understand cognitive and biological factors relating to emotional difficulties in multiple sclerosis. She is the author of several publications pertaining to multiple sclerosis and has also presented her work at numerous conferences.

50 years of the Colworth Medal

The Colworth Medal is an esteemed annual award for outstanding research by a young biochemist of any nationality who has carried out the majority of his or her work in the UK or the Republic of Ireland. Donated in 1963 by Unilever Research Colworth Laboratory, the award is made to a scientist who is 35 years of age or under, at the time of the award's nomination deadline. Interviews with past winners, carried out by Mark Burgess, will appear in The Biochemist throughout 2013; in this issue, the 2000s.