Streaks in Daily Returns
61 Pages Posted: 8 Jul 2020 Last revised: 14 Feb 2022
Date Written: June 15, 2020
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
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