1. Behavioral Finance
Economics 437

2. The Big Three DeBondt-Thaler 1984 Fama-French 1992
Jegadeesh-Titman 1993

3. “Price Momentum” or “Earnings Momentum”
Ball and Brown 1986
Jegadeesh-Titman 1993

4. Ball & Brown 1986 Market “underreacts” to earnings surprises
Article generally ignored until Jagdeesh-Titman
Time span suggests that Ball-Brown effect may be the same thing as Jagdeesh-Titman

5. Jegadeesh and Titman (1993)
Relative strength strategies, sometimes called “earnings momentum” strategies
Find past winners and and past losers (using 3 to 12 month holding periods) generate gains (winners gain; losers lose)
Construct W portfolio and L portfolio
W-L (using 6 month periods) earns more than12 % better than market portfolio
Longer term portfolios do best in next 12 months
Interpretation in “event time”
Doesn’t work in January

6. Chan, Jegadeesh, Lakonishok 1996
Is it earnings? Is it price?
They 7.7 percent six month gap between winner portfolios and loser portfolios using price momentum.
Conclusion (page 1709): “ In general, the price momentum effect tends to be stronger and longer-lived than the earnings momentum effect.”

7. Chordia-Shivakumar, 2006
Is it “pricing momentum” or “earnings momentum” that drives the “under-reaction” phenomenon?
Conclude the earnings momentum is the key factor.
Price momentum variables are a “noisy proxy” for earnings momentum

8. Hong, Lee & Swaminathan 2003
Earnings Momentum is the real driver of price momentum
Systematic relationship between earnings momentum and future GDP growth – hence a “risk factor”
This matters, because if there is a risk factor, then momentum might be consistent with EMH (which price momentum generally is not)

9. Kothari, Shanken, Sloan 1995 F-F are wrong
Beta does matter (explains returns of 6 to 9 % per year) KSS uses “annual” not “monthly” betas
B/M matters, but not as much as you think
Data snooping
Survivor bias in the data

10. Chan 1988 (on DeBondt-Thaler)
Risks of loser are greater than risks of winners
So, they should get higher returns
But they don’t really, after adjusting for transaction costs

11. Zarowin (1990) Losers tend to be small stocks
When losers are compared to winners of equal size, there is little evidence of any return discrpancy
When winners are smaller than losers, winners outperform losers

12. Lakonishov, Shleifer, Vishny, 1994
Questions:
Do value stocks really beat out growth stocks (the F-F issue revisited)?
Are value stocks actually riskier
Is there a reason that value stocks do better?
Answers:
Yes, by 10 – 11 percent annually
No, they outperform is all periods
Yes, future earnings of value stocks are better than predictions – opposite for growth stocks

13. The End