As we noted in Table 1, the strategies by buying past winners and selling past losers can only earn positive profits in the medium time horizon, about from 3 to 9 month holding periods. There will be a return reversal if we extend the time horizon to longer than 18 months. In reversing, the strategy by buying past losers and selling past winners can earn positive profits in the long time horizon. Jegadeesh and Titman (1993) and Conrad and Kaul (1998) also find similar phenomenon. In this section, we extended the time-horizons of all strategies we discussed above to 36 months.

To make the contrarian strategies comparable with the medium term momentum strategies, we still use the same strategy forming processes except for the length of the forming and holding periods. Hence, the profits earned by these contrarian strategies are negative. Table 8 reports the profits earned by different contrarian strategies. To simplify, we only report the equally forming and holding period strategies.

There are six panels in Table 8. Panel A shows that the trading strategies of buying past winners and selling past losers earn negative profits during the period January 1985– November 1996 as suggested in previous literatures. However, we find a different style in Panel B, which reports the long-term profits earned by insiders trading based momentum strategies. It shows that the insiders trading based momentum strategies still can earn positive profits even the time horizon is extended to 36 months. This may be due to insiders trading their firms’ stocks based on their long-term prospectus.

Panel C shows that the momentum effects of WBLS can be extended to 18 months, while the naı¨ve momentum strategy cannot earn statistically significant positive profits only within 12 months. The inverse of WBLS happened as late as 24 months after the position forming. Panel D shows that the negative profits earned by long-term WBLS still exist after the size and BM adjustment. In all 36/36 strategies, we observe the LBLS and WZLZ can obtain −0.03 and −0.05% per month contrarian profits. These results support the prediction made by our continuous overreaction story.

Jihong Xiang, Jia He , Min Cao

Next: Conclusions

Summary: Index