Streaks in Daily Returns

58 Pages Posted: 8 Jul 2020 Last revised: 13 Oct 2020

See all articles by Alexander Klos

Alexander Klos

University of Kiel - Institute for Quantitative Business and Economics Research (QBER)

Alexandra Koehl

University of Kiel - Institute for Quantitative Business and Economics Research (QBER)

Simon Rottke

University of Amsterdam - Finance Group; Tinbergen Institute

Date Written: June 15, 2020

Abstract

A simple model of return extrapolation suggests that streaks in returns, which we define as n-day consecutive over-/under-performance relative to the market, predict future returns. We test this prediction using daily U.S. data and find strong empirical support. Buying stocks with negative streaks and selling stocks with positive streaks yields annualized Sharpe ratios around 2. We replicate the results in international markets and are able to increase the Sharpe ratio to above 3 by diversifying across regions. We argue that liquidity is unlikely to explain the results as streak portfolio returns based on mid-quote-prices are strongest among stocks with the lowest bid-ask spreads.

Keywords: streaks, return extrapolation, investor behavior

JEL Classification: G12,G4

Suggested Citation

Klos, Alexander and Koehl, Alexandra and Rottke, Simon, Streaks in Daily Returns (June 15, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3626770 or http://dx.doi.org/10.2139/ssrn.3626770

Alexander Klos

University of Kiel - Institute for Quantitative Business and Economics Research (QBER) ( email )

Heinrich-Hecht-Platz 9
Kiel, 24118
Germany

HOME PAGE: http://www.qber.uni-kiel.de/

Alexandra Koehl

University of Kiel - Institute for Quantitative Business and Economics Research (QBER) ( email )

Heinrich-Hecht-Platz 9
Kiel, Schleswig-Holstein 24118
Germany

Simon Rottke (Contact Author)

University of Amsterdam - Finance Group ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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