Investing in Stock Market Anomalies
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
Stephen J. Brown
New York University - Stern School of Business
K. Ozgur Demirtas
April 9, 2011
This paper provides an explanation of investing in stock market anomalies in an expected utility paradigm. Classical selection rules fail to provide a preference for high expected return portfolios. The paper utilizes the almost dominance rules to examine the practice of investing in size, book-to-market, momentum, short-term and long-term reversal anomalies. The results indicate that popular investment choices such as value and small stocks do not dominate growth and big stocks. However, the short-term reversal and momentum strategies create efficient investment alternatives. Bilateral comparisons of stock market anomalies provide evidence for the superior performance of size, short-term reversal, and momentum for 1-month to 12-month horizon and book-to-market and long-term reversal for longer term horizons of 3 to 5 years. The relative strength of small, value, momentum-winner, short-term and long-term losers becomes more prevalent when the time-varying conditional distributions are examined.
Number of Pages in PDF File: 52
Keywords: Stock Market Anomalies, Momentum, Reversal, Size, Value Premium
JEL Classification: G10, G11, G12
Date posted: April 10, 2011
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