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
CUNY Baruch College - Zicklin School of Business
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, G12working papers series
Date posted: April 10, 2011
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