III. Evidence for Winner–Loser Effects Across 16 National Markets
IV. Can Differences in Risk Explain the Winner–Loser Reversals?
A. Simple Measures of Risk
B. Testing for Differences in Risk Exposures
C. Testing Portfolio Performance in Adverse Economic States
V. Other Possible Explanations for Winner–Loser Reversals
1. Testing for Winner–Loser Effects Among National Stock Market Indices: End–Quarter Data. December 1969–December 1995
2. Testing for Differences in Risk Exposures
3. Average Performance of Portfolios in Different Economic States
4. The Role of Country Size in Winner–Loser Reversals
1. Average Time Profile of Winner–Loser Effects
2. Winner–Loser Reversals Over Time
A number of studies have shown the presence of “winner–loser reversals” in the U.S. stock market: stocks that have been “losers” in a given ranking period are subsequently likely to yield higher returns than the corresponding “winner” stocks. The differences in returns are striking, although it has been argued that such results are subject to methodological problems and that the return differentials primarily reflect differences in risk.
This paper examines the evidence for similar winner-loser reversals in national stock market indices, using data for the return indices of 16 national markets for the period 1970–95. Reversals are found to be strongest around the 3-year horizon where test-period return differentials have averaged more than 6 percent a year in the period since 1970. Under the assumption that national markets were sufficiently open in the sample period to allow international investors to remove any incipient mispricing, such winner-loser effects would be evidence for market inefficiency, unless they could be explained by differences in risk exposures.
The major result of the paper is the absence of any support for the notion that the reversals might reflect risk differentials. There is no evidence that test-period returns of prior losers were significantly riskier than those of prior winners, either in terms of their standard deviations, their correlations with the world market return or other risk factors, or their performance in adverse states of the world. However, there is evidence that winner-loser reversals were larger among the smaller markets than the larger markets, so there may be an element of a “small-country effect,” perhaps related to some form of market imperfection. The reversals, therefore, remain largely unexplained, which may not be surprising given that researchers still differ in their assessment of the causes of price-based anomalies in the U.S. market.