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).
Keywords: Winner/Loser Hypothesis, Negative Autocorrelation, Abnormal Performance
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