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Behavioral Finance

Behavioral Finance. Economics 437. Momentum Investing. Earning Momentum “Under-reaction” Ball-Brown Price Momentum Jegadeesh-Titman. Ball & Brown 1986. Market “underreacts” to earnings surprises Article generally ignored until Jagdeesh-Titman

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Behavioral Finance

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  1. Behavioral Finance Economics 437

  2. Momentum Investing • Earning Momentum • “Under-reaction” • Ball-Brown • Price Momentum • Jegadeesh-Titman

  3. 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

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

  5. Lakonishov, Shleifer, Vishny, 1994 • Data: 1963-1990 • 5 year back, 5 year forward • 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 • In the 25 worst months, value was down 8.6%, glamour stocks down 10.3% (see page 1568)

  6. The End

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