FINC3017 Investments and Portfolio Management
Essay: Market Efficiency and Anomalies
Topic：Stock price momentum: Jegadeesh and Titman (1993)
Momentum anomaly and EMH
Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) 闪客帝国theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely钻石玫瑰 debated. EMH states that no consistent excess return can be achieved since curity prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, becau it is impossible to get abnormal return by aggressive trading.
However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winn岗位工资制
ers and short past lors earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits.
Literature review and the reason of anomaly
A large number of literatures illustrate that momentum anomaly exist. Some important literatures are Chan, Jegadeesh and Lakonishok (1996), Conrad and Kaul (1998) and Moskowitz and Grinblatt (1999). 委派Lee and Swaminathan (2000) find high past turnover stocks exhibit larger magnitude of momentum but shorter persistence of momentum. Grundy and Martin (2001) study of the US market 1926 – 1995 found that after adjusting for dynamic risks, there are stable momentum profits. However, Carhart (1997), Brooks and Miffre (2007) believe if take transaction costs into account, there will be no persistence performance of superior stocks. But underperformance will remain wor. Grundy and Martin (2001) show that round-trip cost above 1.5% makes the anomaly unprofitable.
It is difficult to explain price momentum u traditional risk-return model (Fama and French (1996), Grundy and Martin (2001)). But, momentum anomaly exists for reasons. The underlying mechanism of the anomaly can be explained from the perspective of behavioural finance and Knightian uncertainty. Both underreaction and 摆脱的英文delayed overreaction to the information can cau price momentum.
Barberis, Schleifer and Vishny (1998) show that becau of conrvatism (Edwards 1968), investors tend to underweighting new information at the beginning. Information slowly spread and slowly incorporates into share price. Therefore, current information can predict future price. Momentum anomaly exists. However, in the long term, overreaction will lead the stock price to rever which is consistent with De Bondt and Thaler (1985).
Hong and Stein (1999) divide investors into ‘news watchers’ and ‘momentum traders’ groups. It demonstrates different functions of investors rather than cognitive bias. As information gradually circulate among news watchers, underreaction cau price momentum. With momentum traders start trading, market is overreacting, then price reve
rt in the long run. Chan, Jegadeesh and Lakonishok (1996) arrived at the same conclusion. Besides, it asrts the inertia exist becau of the prolonged revising of analyst forecasts.
On the other hand, Daniel, Hirshleifer and Subrahmanyam(1998) assume investors are overconfidence to private information. When information spread out, due to lf-attribution phenomenon, investors will overreact and generate momentum profit.
Since current risk-return model cannot fully explain momentum effect, there might be some immeasurable risks exist to explain this anomaly. It is called Knightian uncertainty (Knight 1921). Ford, Kely and Pang (2005) believe most individuals are ambiguity-aver. When Knightian uncertainty exists, basic value of the stock cannot be estimated accurately. Trading frequency may increa to avoid risk, therefore cau price momentum. Herd behavior might be another reason as well.
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However, Du (2012) calls for review explanation to momentum effect becau neither risk nor behavioral bias in isolation can explain this anomaly.
逍遥叹下载Momentum effect across time and countries
Price momentum exists in the US market over time. Jegadeesh and Titman (1993) obrve momentum effect from 1965 to 1989. Jegadeesh and Titman (2001) show the effect from 1965 to 1998. Jegadeesh and Titman (2011) confirm the effect exists from 1965 to 2005. Momentum strategy continuous to generate above average since it was first documented in 1990s.
办公室设计说明Besides, price momentum was obrved in many countries. Rouwenhorst (1998) finds momentum in 12 European countries from 1978 to 1995. Hu and Chan (2011) obrve significant continuous excess returns across 48 countries from 1995 through 2007. Vilbern (2008) analys Swedish market from 1999 to 2007. The result indicates momentum effect can be ud to make profit after adjusting for transaction cost. Naughton, Truong and Veeraraghavan (2008) find out momentum profits in Chine market from 1995 to 2005.
