Download - Jegadeesh (1993)
-
7/21/2019 Jegadeesh (1993)
1/10
Returns to Buying
Winners and SellingLosers: Implications forStock Market Eciency
Presenter: Rasool Bakhsh hanna
Mu!ashir
Ru"aiya Shaikh
Sha#ia $lam
By Narasimhan Jegadeesh and Sheridan Titman
-
7/21/2019 Jegadeesh (1993)
2/10
stock prices also overreact to information
Contrarian StrategyBuying past losers
Selling past winners
Relative Strength StrategyBuying past winners
Selling past losers
Introduction
-
7/21/2019 Jegadeesh (1993)
3/10
IntroductionDe Bondt and Thaler !"#$% show that over &' to $'year
holding periods stocks that per'formed poorly over theprevious & to $ years achieve higher returns than stocksthat performed well over the same period(
Jegadeesh !"")% and *ehmann !"")% provide evidence ofshorter'term return reversals( strategies that select stocks+ased on their returns in the previous week or monthgenerate signi,cant a+normal returns(
Short term price pressure*ack of li-uidity
*o and .ac/inlay !"")% argue that a large part of thea+normal returns documented +y Jegadeesh and *ehmannis attri+uta+le to a delayed stock price reaction to common
factors rather than to overreaction(
-
7/21/2019 Jegadeesh (1993)
4/10
Introduction*evy !"01% claims that a trading rule that +uys
stocks with current prices that are su+stantially higherthan their average prices over the past 21 weeks
reali3es signi,cant a+normal returns(Jensen and Bennington analy3e the pro,ta+ility of
*evy4s trading rule over a long time period that was5for the most part5 outside *evy4s original sample
periodThey ,nd opposite results in other sample of data
Despite recent research on contrarian most investorsuse relative strength strategy and earn a+normal
returns(
-
7/21/2019 Jegadeesh (1993)
5/10
IntroductionIf contrarian strategy is key to a+normal
return earning then why +y using relativestrength strategy practitioners generatea+normal returns6Returns are spurious or 7nrelated to past
returns
Di8erence is due to di8erent time hori3ons Contrarian !'& weeks or &'$ years%
RSS &'!2 months returns%
-
7/21/2019 Jegadeesh (1993)
6/10
Section I ' Trading
StrategiesIf stock prices either overreact or underreact
to information5 then pro,ta+le tradingstrategies that selecf stocks +ased on theirpast returns will e9ist(
-
7/21/2019 Jegadeesh (1993)
7/10
Section I ' Trading
StrategiesInvestigates the e:ciency of the stock market
+y e9amining the pro,ta+ility of a num+er ofthese strategies(
Strategies;!stset of strategy !0 strategies% < include
stocks +ased on their past !5 25 &5 = > -uartersand have holding periods that vary from ! < >
-uarters(
2ndset of strategy !0 strategies% < same as !st+ut this one skips a week +etween the portfolioformation period and the holding period(
-
7/21/2019 Jegadeesh (1993)
8/10
Strategies include portfolios with overlapping
holding periods(Select stocks on the +asis of returns over the past J
months and holds them for / months J'month?/'monthstrategy%(
!) decile portfolios5 e-ually weigh@scending order of the securitiesA returns over the past J
months(
Top decile portfolio < losers
Bottom decile portfolio < winners
In each month t5 +uy winner portfolio and selllower portfolio5 holding for / months(
Closes out the position initiated in month t