Streaks in Daily Returns

61 Pages Posted: 8 Jul 2020 Last revised: 14 Feb 2022

See all articles by Alexander Klos

Alexander Klos

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

Alexandra Koehl

Allianz Global Investors

Simon Rottke

University of Amsterdam - Finance Group; Tinbergen Institute

Date Written: June 15, 2020

Abstract

Streaks in returns, which we define as n-day consecutive over-/under-performance relative to the market, predict future daily returns. A value-weighted portfolio buying stocks with negative streaks and selling stocks with positive streaks yields annualized Sharpe ratios around 2. We successfully replicate the result in international equity markets and find low correlations across regions. Predictability is robust among the largest (market capitalization above the 50% or 80% NYSE quantiles) and most liquid stocks (low quoted bid-ask spread or Amihud measure tercile). A model of short-term return extrapolation among investors generates predictions consistent with the empirical findings.

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

Allianz Global Investors ( email )

Frankfurt am Main, Hessen
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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