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Review of Quantitative Finance and Accounting

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11.04.2018 | Original Research

The impact of elasticity on disposition effect driven momentum, substitutability, size, and January seasonality

verfasst von: Jared Egginton, Jungshik Hur, Vivek Singh

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2019

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Abstract

We find that momentum caused by disposition effect is mainly driven by stocks with unrealized capital gains and it is greater when price elasticity of demand is low. We further find that the size effect on momentum and January seasonality in momentum disappear when price elasticity of demand is low. In addition, the price elasticity of demand for stocks is related to the phase of business cycle and degree of product substitutability. Our findings are robust to other factors and the effect of market states on momentum profits.

Vorheriger Artikel Bond yield and credit rating: evidence of Chinese local government financing vehicles

Nächster Artikel Managerial risk incentives and accounting conservatism

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Yeh and Li (2011), Jiang et al. (2012) and Yu (2012) demonstrate that risk-based explanations cannot account for all of the profits of momentum strategies.

George and Hwang (2004) and Bhootra and Hur (2013) document anchoring bias (Tversky and Kahneman 1974) for the momentum effect.

Other papers that explain momentum arising out of disposition effect include Hur et al. (2010).

See Page 314 in Grinblatt and Han (2005) for more detailed explanation.

Grinblatt et al. (1995) show that momentum is entirely driven by buying winners and not by selling losers.

This essentially removes all ADRs, SBIs, Units, REITS, closed-end funds and companies incorporated outside the U.S.A.

Use of T = 3 years though somewhat arbitrary recognizes the fact that longer time period are not useful as distant market prices have little effect on the reference price while it also gives us an accurate measure of unrealized capital gains (losses). Moreover Grinblatt and Han (2005) show that ability of capital gains overhang measure to predict future returns is insensitive to using 3, 5 or 7 years of past returns and volume data.

Please see Page 585 in Shleifer (1986) for more detailed explanation.

Similar to Fu (2009), the idiosyncratic volatility of stock i in month t is defined as standard deviation of the residuals from three factor model regression using daily returns times the square root of the number of trading days in the month. We include only firms that have at least 12 trading days in a month for the computation of idiosyncratic volatility. Please see Page 26 in Fu (2009) for detailed explanation.

Please see Page 318 in Grinblatt and Han (2005) for more detailed explanation.

We thank an anonymous referee for this insightful argument.

Table 2 presents similar findings in Table 2 in Lee and Swaminathan (2000) that (1) most of the momentum profits come from selling losers with high volume and (2) the average returns difference between winner with low volume and winners with high volume is statistically insignificant.

We exclude the months with negative slope coefficient of regression Eq. (3) because the increase of abnormal volume should cause the increase of abnormal return if it captures inelasticity of demand. However, our results are robust to the inclusion of those months.

We extracted the returns of the factor portfolios from Professor Kenneth French’s website. We sincerely thank Professor French for providing us with the data.

There are 492 months of liquidity factors unlike 513 for Fama–French 3 factors. After excluding 15 months of negative elasticity months, we form 477 months into 3 groups on elasticity in Panel D.

We identity the periods of recession in our sample period from NBER website as follows: December 1969–November 1970; November 1973–March 1975; January–July 1980; July 1981–November 1982; July 1990–March 1991; March 2001–November 2001; December 2007–June 2009.

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Titel: The impact of elasticity on disposition effect driven momentum, substitutability, size, and January seasonality
verfasst von: Jared Egginton
Jungshik Hur
Vivek Singh
Publikationsdatum: 11.04.2018
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2019
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-018-0725-6

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