Behavioral Finance Economics 437 Behavioral Finance 2019 Momentum

Behavioral Finance Economics 437 Behavioral Finance 2019 Momentum Investing April 2

Momentum Investing n Earning Momentum n “Under-reaction” n Ball-Brown n Price Momentum n Jegadeesh-Titman Behavioral Finance 2019 Momentum Investing April 2

Ball & Brown 1986 n Market “underreacts” to earnings surprises n Article generally ignored until Jagdeesh- Titman n Time span suggests that Ball-Brown effect may be the same thing as Jagdeesh-Titman Behavioral Finance 2019 Momentum Investing April 2

Jegadeesh and Titman (1993) n Relative strength strategies, sometimes called n n n “momentum” strategies Find past winners and past losers (using 3 to 12 month holding periods) generate gains (winners gain; losers lose) Construct W portfolio and L portfolio W-L (using 6 month periods) earns more than 12 % better than market portfolio Longer term portfolios do best in next 12 months Interpretation in “event time” Doesn’t work in January Behavioral Finance 2019 Momentum Investing April 2

Lakonishov, Shleifer, Vishny, 1994 n Data: 1963 -1990 n 5 year back, 5 year forward Questions: n Do value stocks really beat out growth stocks (the F-F issue revisited)? n Are value stocks actually riskier n Is there a reason that value stocks do better? n Answers: n Yes, by 10 – 11 percent annually n No, they outperform is all periods n Yes, future earnings of value stocks are better than predictions – opposite for growth stocks n In the 25 worst months, value was down 8. 6%, glamour stocks down 10. 3% (see page 1568) n Behavioral Finance 2019 Momentum Investing April 2

The End Behavioral Finance 2019 Momentum Investing April 2