Behavioral Finance Economics 437 Behavioral Finance Evidence April
Behavioral Finance Economics 437 Behavioral Finance Evidence April 10, 2018
The Big Three n De. Bondt-Thaler 1984 n Fama-French 1992 n Jegadeesh-Titman 1993 Behavioral Finance Evidence April 10, 2018
“Price Momentum” or “Earnings Momentum” n Ball and Brown 1986 n Jegadeesh-Titman 1993 Behavioral Finance Evidence April 10, 2018
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 Evidence April 10, 2018
Jegadeesh and Titman (1993) n Relative strength strategies, sometimes called n n n “earnings 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 Evidence April 10, 2018
Chan, Jegadeesh, Lakonishok 1996 n Is it earnings? Is it price? n They 7. 7 percent six month gap between winner portfolios and loser portfolios using price momentum. n Conclusion (page 1709): “ In general, the price momentum effect tends to be stronger and longer-lived than the earnings momentum effect. ” Behavioral Finance Evidence April 10, 2018
Chordia-Shivakumar, 2006 n Is it “pricing momentum” or “earnings momentum” that drives the “under-reaction” phenomenon? n Conclude the earnings momentum is the key factor. n Price momentum variables are a “noisy proxy” for earnings momentum Behavioral Finance Evidence April 10, 2018
Hong, Lee & Swaminathan 2003 n Earnings Momentum is the real driver of price momentum n Systematic relationship between earnings momentum and future GDP growth – hence a “risk factor” n This matters, because if there is a risk factor, then momentum might be consistent with EMH (which price momentum generally is not) Behavioral Finance Evidence April 10, 2018
Kothari, Shanken, Sloan 1995 n F-F are wrong n Beta does matter (explains returns of 6 to 9 % per year) KSS uses “annual” not “monthly” betas n B/M matters, but not as much as you think n n Behavioral Finance Data snooping Survivor bias in the data Evidence April 10, 2018
Chan 1988 (on De. Bondt-Thaler) n Risks of loser are greater than risks of winners n So, they should get higher returns n But they don’t really, after adjusting for transaction costs Behavioral Finance Evidence April 10, 2018
Zarowin (1990) n Losers tend to be small stocks n When losers are compared to winners of equal size, there is little evidence of any return discrpancy n When winners are smaller than losers, winners outperform losers Behavioral Finance Evidence April 10, 2018
Lakonishov, Shleifer, Vishny, 1994 n Questions: 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 Behavioral Finance Evidence April 10, 2018
The End Behavioral Finance Evidence April 10, 2018
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