Abstract

This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3-to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented.

Scientific Portfolio AI- Generated Summary

The paper “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency” examines the profitability of trading strategies based on past stock returns. The authors argue that if stock prices either overreact or underreact to information, then profitable trading strategies that select stocks based on their past returns will exist.

The study analyzes the returns of buying past winners and selling past losers in the US stock market from 1965 to 1989. The authors find that these trading strategies generate significant positive returns, even after adjusting for risk factors such as size, book-to-market ratio, and momentum. The results suggest that the stock market is not fully efficient, as profitable trading strategies based on past returns should not exist in an efficient market.

The authors also examine the performance of these trading strategies around earnings announcement dates. They find that the returns to buying past winners and selling past losers are even higher during the two months following earnings announcements. This suggests that investors may underreact to earnings news, leading to a delayed adjustment of stock prices.

The paper concludes by discussing the implications of these findings for stock market efficiency. The authors argue that the existence of profitable trading strategies based on past returns implies that the stock market is not fully efficient. However, they note that the profitability of these strategies may be due to risk factors that are not fully captured by traditional asset pricing models.

Overall, the paper provides valuable insights into the efficiency of the stock market and the profitability of trading strategies based on past returns. The findings suggest that the stock market is not fully efficient, but further research is needed to fully understand the risk factors that drive the profitability of these trading strategies.