Price Reversal and Firm Size in the U.S. Stock Markets, New Evidence

Title Price Reversal and Firm Size in the U.S. Stock Markets, New Evidence
Author W. K. Leung
Years 2009

 

Theoretical Basis This study investigates the return behaviors of U.S. stocks listed in NYSE, AMEX, NASDAQ and NYSE ARCA from July 1963 to December 2007. Past studies are inconclusive as they either report short term momentum and long term reversal or vise versa or ambiguous trends. This is the first study that reports significant short and long term price reversal of U.S. stocks under some conditions by sorting them first by past return or price ratio and then by market capitalization (2 sorts) instead of what are done by most of the past studies by just sorting stocks by either past return or price ratio (1 sort). We also show that for stocks from the loser, medium or winner groups, small capitalization stocks always significantly outperform large capitalization stocks in the future.
Methods and Subjects In each month from July 1963 to December 2002 we sort NYSE-AMEX-NASDAQ-NYSE/ARCA stocks by previous 3, 6, 9 or 12 months (length of sort periods=3, 6, 9 and 12 respectively) return using the JT (Jegadeesh and Titman 1993) and MG (Moskowitz and Grinblatt 1999) methods and the ratio of closing price to previous 3, 6, 9 or 12 months high (price ratio) by GH (George and Hwang 2004) methods into 3, 5 or 10 groups. The sorting ends in December 2002 because we need to calculate the next 60th month return which needs stock return from January 2003 to December 2007.
Main Result Winners are groups with the highest return or price ratio, medium return are groups with medium return or price ratio and losers are groups with the lowest return or price ratio. In each of the winner, medium or loser groups again sort the stocks into 3, 5 or 10 groups by market capitalization (stocks with largest market capitalization are called large capitalization groups, medium market capitalization medium cap and smallest market capitalization small cap). 1) Loser/large capitalization are the groups of stocks with loser return or price ratio and largest market capitalization and 2) the group of stocks 1 This is why the sorting has to end in December 2002 because we only have CRSP data until December 2007. 4 with loser return or price ratio and medium market capitalization are called the loser/medium capitalization groups. Likewise, 3) loser/small capitalization groups are stocks with loser return or price ratio and smallest market capitalization, 4) medium/large capitalization are those with medium return or price ratio and

largest capitalization, 5) medium –small capitalization are those with medium return or price ratio and smallest capitalization, 6) winner/large capitalization are those with winner return or price ratio and largest capitalization, 7) winner/medium capitalization are those with winner return or price ratio and medium capitalization and 8) winner/small capitalization are those with winner return or price ratio and smallest capitalization.

Conclusion The monthly return of the above 8 combination groups at the end of next 3 – 12 months and 18 – 60 months are then calculated by the JT approach. The difference of return between two combination groups is reported below.

 

 

 

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