Abstract
This chapter first reviews the methodology and the main findings of the winnerloser effect in the literature. Second, I relate these findings to the concept of market efficiency. Then I review three types of explanations which have been proposed in the literature. Finally, I have a more detailed look at those papers which are most closely related to my own investigation.
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Shorter investment horizons have been investigated by Jegadeesh (1990) and Jegadeesh and Titman (1993). For a data set from the US they found that daily, weekly, and monthly returns show negative autocorrelation. For an investment horizon of 3 to 12 months they report positive autocorrelation (Jegadeesh and Titman (1993), Bernard and Thomas (1990)). Schiereck and Weber (1995) obtain the same finding for the German stock market.
Strictly speaking, forward prices follow a martingale. Under the assumption of risk neutrality stock prices have to be discounted by the risk-free rate and hence follow a submartingale. For a more detailed exposition cf. Chapter 5 of this monograph.
A famous application of this change of measure was developed earlier by Black and Scholes (1973). To price options they transformed the fundamental stochastic differential equation such that it excluded the stochastic part. This implied a newly defined probability measure under which stock prices had to follow a martingale.
As this monograph is mainly concerned with long-term dependence I do not review this literature here. The main arguments can be found in Roll (1984).
Although this is an important factor for the explanation of index returns, this effect is not likely to play a big role for the explanation of the winner-loser effect. For the winner-loser effect I do not discuss the properties of index returns. 1 am only concerned with the cross-section of stock returns. Starting point for my investigation are portfolio returns which I do not disaggregate further. Disaggregation of performance related portfolios might not be economically meaningful. An alternative decomposition into industry portfolios is more promising. Industry components are likely to play an important role for the transmission between individual stock returns and the business cycle. However, in a preliminary analysis 1 have extracted industry components from my portfolios which did not show much explanatory power.
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© 2004 Springer-Verlag Berlin Heidelberg
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Külpmann, M. (2004). Literature. In: Irrational Exuberance Reconsidered. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-24765-4_3
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DOI: https://doi.org/10.1007/978-3-540-24765-4_3
Publisher Name: Springer, Berlin, Heidelberg
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