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