Behavioral Finance Economics 437

The Big Three DeBondt-Thaler 1984 Fama-French 1992 Jegadeesh-Titman 1993

“Price Momentum” or “Earnings Momentum” Ball and Brown 1986 Jegadeesh-Titman 1993

Ball & Brown 1986 Market “underreacts” to earnings surprises Article generally ignored until Jagdeesh-Titman Time span suggests that Ball-Brown effect may be the same thing as Jagdeesh-Titman

Jegadeesh and Titman (1993) Relative strength strategies, sometimes called “earnings momentum” strategies Find past winners and 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 than12 % better than market portfolio Longer term portfolios do best in next 12 months Interpretation in “event time” Doesn’t work in January

Chan, Jegadeesh, Lakonishok 1996 Is it earnings? Is it price? They 7.7 percent six month gap between winner portfolios and loser portfolios using price momentum. Conclusion (page 1709): “ In general, the price momentum effect tends to be stronger and longer-lived than the earnings momentum effect.”

Chordia-Shivakumar, 2006 Is it “pricing momentum” or “earnings momentum” that drives the “under-reaction” phenomenon? Conclude the earnings momentum is the key factor. Price momentum variables are a “noisy proxy” for earnings momentum

Hong, Lee & Swaminathan 2003 Earnings Momentum is the real driver of price momentum Systematic relationship between earnings momentum and future GDP growth – hence a “risk factor” This matters, because if there is a risk factor, then momentum might be consistent with EMH (which price momentum generally is not)

Kothari, Shanken, Sloan 1995 F-F are wrong Beta does matter (explains returns of 6 to 9 % per year) KSS uses “annual” not “monthly” betas B/M matters, but not as much as you think Data snooping Survivor bias in the data

Chan 1988 (on DeBondt-Thaler) Risks of loser are greater than risks of winners So, they should get higher returns But they don’t really, after adjusting for transaction costs

Zarowin (1990) Losers tend to be small stocks When losers are compared to winners of equal size, there is little evidence of any return discrpancy When winners are smaller than losers, winners outperform losers

Lakonishov, Shleifer, Vishny, 1994 Questions: Do value stocks really beat out growth stocks (the F-F issue revisited)? Are value stocks actually riskier Is there a reason that value stocks do better? Answers: Yes, by 10 – 11 percent annually No, they outperform is all periods Yes, future earnings of value stocks are better than predictions – opposite for growth stocks

The End