Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Losers Win, Winners Lose: Challenging the Notion of Market Efficiency

Last Updated on 10 February, 2024 by Rejaul Karim

Losers Win, Winners Lose: Evidence Against Market Efficiency” by Zachary Smith is a research project aimed at assessing the presence of the Winner/Loser Phenomenon outlined in DeBondt and Thaler (1985) using a distinctive dataset and various examination windows.

The study employs sector ETFs as proxies for general market performance, mitigating the impact of turn-of-the-year and seasonality effects. The findings present statistically significant evidence of short-run negative autocorrelation in returns and reveal that if investors had daily rebalanced their investments in the previous day’s loser and winner ETFs, they would have gained Cumulative Abnormal Returns of 113.50% and -134.13%, respectively.

Moreover, the paper supports experimental research by documenting evidence of trends in both the market and loser portfolios. Ultimately, the study contributes to understanding short-run negative autocorrelation in stock market performance, suggesting the market often exhibits signs of short-term overreaction to information with no systemic risk evidence.

Abstract Of Paper

The goal of this research project was to evaluate whether there is statistically significant evidence of the Winner/Loser Phenomenon identified in DeBondt and Thaler (1985) using a unique data set and multiple examination windows. This paper uses sector ETFs as proxies for general market performance, which minimizes the impact of turn-of-the-year and seasonality effects that influenced the acceptance of the anomaly indenified in DeBondt and Thaler’s “Does the Stock Market Overreact” paper (i.e. the finding that previous ‘Losers’ tend to outperform the ‘Winners’ over different time horizons). This study finds statistically significant evidence of short-run negative autocorrelation of returns. More importantly, if investors used a daily rebalance over this time period and invested simultaneously in the previous day’s loser ETF and the previous day’s winner ETF they would have obtained Cumulative Abnormal Returns of 113.50% and -134.13%, respectively. In addition, this study supports the experimental research findings documented in Bloomfield, R., Libby, R., and Nelson, M. (1998) and Bloomfield, R. and Hales, J. (2002) by illustrating that there is evidence of trends in both the market portfolio and the loser portfolio (i.e. sign tests were conducted and the results were significant using an α of .001); moreover, the loser portfolio shows signs of significant outperformance when the preceding day’s performance is negative (i.e. the researcher found that the average returns for the loser portfolios were greater than the market portfolio using an α of .10). In summary, this study provides further evidence of short-run negative autocorrelation in stock market price performance, adds to the literature that suggests that the stock market tends to show signs of short-term ‘overreaction’ to information and this overreaction seems to be relatively short lived, that there does not seem to be evidence that the outperformance is due to systemic risk, and evidence to substantiate, in a market environment, the experimental findings presented in Bloomfield et al. (1998) and Bloomfield et al. (2002).

Original paper – Download PDF

Here you can download the PDF and original paper of Losers Win, Winners Lose: Evidence Against Market Efficiency.

(An option to download will come shortly)

Author

Zachary Smith
Saint Leo University

Conclusion

In conclusion, Zachary Smith’s research project “Losers Win, Winners Lose: Evidence Against Market Efficiency” delves into the Winner/Loser Phenomenon using a unique dataset and multiple examination windows. The study utilizes sector ETFs to minimize the impact of turn-of-the-year and seasonality effects. Results show statistically significant evidence of short-run negative autocorrelation in returns, supporting previous experimental research findings.

Furthermore, the study reveals that investors employing a daily rebalance strategy could have earned Cumulative Abnormal Returns of 113.50% and -134.13% for loser and winner ETFs, respectively. The loser portfolio also demonstrates significant outperformance when the preceding day’s performance is negative.

Overall, this research adds to the body of literature that indicates stock markets may exhibit short-term overreaction to information, reinforces the experimental findings of Bloomfield et al. (1998) and Bloomfield et al. (2002), and rejects the notion that outperformance is associated with systemic risk.

Related Reading:

Technical Analysis with a Long Term Perspective: Trading Strategies and Market Timing Ability

Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies

FAQ

Q1: What is the main focus of Zachary Smith’s research project, and what phenomenon does it aim to assess?

The research project, “Losers Win, Winners Lose: Evidence Against Market Efficiency” by Zachary Smith, evaluates the Winner/Loser Phenomenon identified in DeBondt and Thaler (1985). It investigates whether there is statistically significant evidence of this phenomenon using a unique dataset and multiple examination windows.

Q2: How does the study utilize sector ETFs, and what are the key findings regarding short-run negative autocorrelation in returns?

The study uses sector ETFs as proxies for general market performance to minimize the impact of turn-of-the-year and seasonality effects. The findings reveal statistically significant evidence of short-run negative autocorrelation in returns, indicating that previous losers tend to outperform winners over different time horizons.

Q3: What are the implications for investors, and what does the research suggest about the market’s reaction to information?

Investors employing a daily rebalance strategy could have gained Cumulative Abnormal Returns of 113.50% and -134.13% for loser and winner ETFs, respectively. The study suggests that the stock market exhibits signs of short-term overreaction to information, and this overreaction seems to be relatively short-lived. Importantly, the outperformance is not associated with systemic risk, rejecting the notion that winners consistently outperform due to inherent risk factors.

Check Our Academic Scholarly Database List For Traders here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password