GLAMOUR VERSUS VALUE: TRADING BEHAVIOR OF INSTITUTIONS AND INDIVIDUAL INVESTORS

We design a new metric to measure the net buying and selling by institutions and individual investors and find that from 1980 to 2004 institutional investors were net buyers of growth stocks and net sellers of value stocks, implying that individual investors were net buyers of value stocks and net sellers of glamour stocks. The institutional preference for glamour and value stocks seems to be related to sell‐side analysts' recommendations and recent favorable stock price performances, especially during the post‐1994 period. Finally, the institutional buying of growth stocks and sale of value stocks was not based on superior information.     

On the relationship between concentration of prospect theory/mental accounting investors,cointegration, and momentum

We examine the role of cointegration between stock prices and their estimated fundamental values in return momentum. We find that the positive relationship between capital gains overhang and future stock returns in Grinblatt and Han (2005) is significantly stronger among the “non-cointegrated” group of stocks as compared with the “cointegrated” group of stocks. Further, for the cointegrated stocks, the slower the speed of adjustment to the cointegrating equilibrium, the greater (smaller) is the future return of stocks with unrealized capital gains (losses). These findings are robust to various firm characteristics including firm size, book-to-market ratio, past returns, idiosyncratic volatility, dispersion in analysts’ earnings forecasts, turnover, individual investor ownership, and industry returns.     

Reexamining momentum profits: Underreaction or overreaction to firm-specific information?

We design a new measure and find that the predictability of past returns on future returns increases as stocks respond with delay to firm-specific information. Our results suggest that momentum is caused by both investors’ underreaction and overreaction to information. However, underreaction to information seems to be the primary cause, particularly during the more recent period. Our findings are robust for recent explanations of momentum profits and alternative methods for computing our measure. We also find that stocks respond with delay to firm-specific information, partly due to certain firm characteristics, and partly because they escape investor attention due to their low visibility. Our paper extends and refines Jegadeesh and Titman’s (J Financ 56(2):699–720, 2001) finding that momentum profits are consistent with behavioral models’ predictions regarding investors’ overreaction.     

Aggregate idiosyncratic volatility,dynamic aspects of loss aversion,and narrow framing

We consider the economy in which an agent faces, in addition to market risk, an additive independent background risk in consumption. In contrast to the Lucas (Econometrica 46:1429–1445, 1978) complete consumption insurance model, under plausible assumptions about the unconditional mean and variance of the agent’s subjective distribution of background risk the model with the additive independent background risk fits the historical average excess return on the US stock market with the coefficient of relative risk aversion (RRA) below five for the subsets of households designated as assetholders. The greater the size and/or the lower the expected value of background risk, the lower (compared to the Lucas (Econometrica 46:1429–1445, 1978) model) the value of the RRA coefficient needed for the model with background risk to match the historical average equity premium. Allowing for an extremely unlike large decrease in the agent’s consumption considerably decreases the required coefficient of RRA. It is concluded that the presence of the additive independent background risk in the consumption of assetholders can account for nearly 60 % of the historical average equity premium, hence rationalizing the equity premium puzzle of Mehra and Prescott (J Monet Econ 15:145–162, 1985). With RRA below five, the model with background risk is consistent with the historical average real interest rate if the agent has the subjective time discount factor lower than, but close to, 1. The findings are robust to the assumed type of background risk, the proxy for the market portfolio, and the threshold value in the definition of assetholders.     

The timing of 52-week high price and momentum

We propose a new momentum strategy based on the timing of a stock’s 52-week high price. We find that the stocks that attained the 52-week high price in the recent past significantly outperform the stocks that attained the 52-week high price in the distant past. In particular, the top 10% of the stocks with the most recent 52-week high price outperform the bottom 10% of the stocks with most distant 52-week high price by 0.70% per month. Further, conditioning on the recency of 52-week high price significantly increases the profitability of momentum strategy based on the nearness of current price to the 52-week high price. Specifically, the average monthly return of this strategy is about twice as large for stocks with recent 52-week high price as compared with stocks with distant 52-week high price.     

The impact of elasticity on disposition effect driven momentum,substitutability, size,and January seasonality

Review of Quantitative Finance and Accounting - We find that momentum caused by disposition effect is mainly driven by stocks with unrealized capital gains and it is greater when price elasticity...     

Does long-term disequilibrium in stock price predict future returns?

We propose a trading strategy based on error correction term (ECT), the residuals from the cointegration relation between the levels of security and the market portfolio. We find that buying stocks in the top 10 % ECT and selling stocks in the bottom 10 % ECT generates 1.09 % a month for 6-month holding period over 1965–2005. The monthly return increases to 1.57 % when the above trading strategy is applied to stocks with insignificant cointegration with the market portfolio. This profit is robust to three and four factor models. Moreover, this profit is neither driven by small and illiquid stocks nor is the result of any inherent positive serial correlation.     

Momentum and the Disposition Effect: The Role of Individual Investors

We hypothesize that disposition effect-induced momentum documented in Grinblatt and Han (2005) should be stronger in stocks with greater individual investors’ presence since individual investors are more prone to the disposition effect. We find strong evidence for our hypothesis for a large sample of NYSE/AMEX/NASDAQ stocks from the end of 1980 to 2005. Our results hold across different momentum strategies using alternative ways of defining individual investors’ presence in a stock and maintain even after controlling for variables known to drive momentum. Furthermore, we find that our results are stronger for hard-to-value stocks consistent with the findings of Kumar (2009).     

High Idiosyncratic Volatility and Low Returns: A Prospect Theory Explanation

The well‐documented negative relationship between idiosyncratic volatility and stock returns is puzzling if investors are risk‐averse. However, under prospect theory, while investors are risk‐averse in the domain of gains, they exhibit risk‐seeking behavior in the domain of losses. Consistent with risk‐seeking investors’ preference for high‐volatility stocks in the loss domain, we find that the negative relationship between idiosyncratic volatility and stock returns is concentrated in stocks with unrealized capital losses, but is nonexistent in stocks with unrealized capital gains. This finding is robust to control for short‐term return reversals and maximum daily return, among other variables.     

Cross‐Section of Expected Returns and Extreme Returns: The Role of Investor Attention and Risk Preferences

Previous work finds a negative and significant relation between the maximum daily return over the past one month and expected future stock returns. We determine that this effect is more pronounced for stocks that achieve their maximum daily returns toward the end of the month and stocks that are associated with capital losses show greater reversals. These results suggest the effect is related to investor attention and risk preferences.