The Periodic Structure of Returns to Buying Winners and Selling Losers
35 Pages Posted: 13 Jan 2004
Date Written: November 7, 2003
This paper documents a periodic structure of average returns to portfolio strategies that buy stocks with high historical returns and sell stocks with low historical returns. Previous research by DeBondt and Thaler (1985, 1987) used cumulative monthly returns to show historical winners earn lower average returns than historical losers 3-5 years after portfolio formation. In contrast we focus on the relationship of a single monthly historical return to future returns. We confirm the DeBondt and Thaler effect and extend it out to 20 years. But we also find an opposite anomaly - winners earn higher returns than losers at annual intervals of 12, 24, ... 240 months. While this effect is larger in January, it also occurs in other calendar months. It is not associated with size, industry, or earnings announcements, neither is it subsumed by bid-ask bounce. This evidence suggests there exists significant seasonal cross-sectional variation in stock returns.
Keywords: Momentum, long-run reversal, periodic structure of stock returns
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