-
Decomposing Momentum: The Forgotten Component
Joint work with Pascal Büsing and Hannes Mohrschladt
Abstract: We split up the standard momentum return over months t-12 to t-2 at the highest stock price within this formation period. Of the overall momentum profits in month t, 84% can be attributed to the return prior to this peak price although research has exclusively focused on the post-peak return so far. Contrary to standard momentum strategies, long-short returns based on the forgotten momentum component are positively skewed, avoid momentum crashes, show no market state dependence, and yield consistent return premiums in both the US and international stock markets.
Available at SSRN
-
The Valuation of Loss Firms: A Stock Market Perspective
Joint work with Hannes Mohrschladt
Abstract: The proportion of exchange-listed firms with negative earnings has increased to over 40% in recent years. Given that the fundamental value of these loss firms is difficult to determine, we expect particularly strong value effects among these firms. We find that the return predictability associated with book-to-market and revenue-to-price is indeed significantly stronger compared to gain firms. Our further analyses on financial analysts, earnings announcement returns, short selling activities, option trading, and limits to arbitrage support a behavioral mechanism for our main finding.
Available at SSRN
-
Idiosyncratic Skewness and Reference Points
Abstract: We study the return predictability by idiosyncratic skewness and find that it is limited to stocks trading at a capital loss overhang. Our empirical results favor an explanation based on Prospect Theory as introduced by Kahneman and Tversky (1979). Our empirical results are consistent with an overvaluation of stocks with high idiosyncratic skewness which is induced by a strong demand for lottery-like stocks by Prospect Theory investors who trade at a loss relative to their reference point. We find that this mispricing is especially strong when limits of arbitrage are high and it is likely to be corrected following periods of high investor sentiment, in expansions, and in months and on days when investor mood tends to be low.
Available at SSRN
