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Attention in the pennies – Major daily movements and medium-term returns
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School of Business |
Master's thesis
Electronic archive copy is available via Aalto Thesis Database.
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en
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62 + 13
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Abstract
In this thesis I study the effect extreme relative daily returns of stocks and the extra attention they receive due to subsequent rankings have on their medium-term performance, i.e. over the following month and the one after two months. I form portfolios based on the stocks’ winner-loser statuses with a threshold of top/bottom 80 and analyse their performance in both equal- and value-weighted settings, with data sourced from the U.S. stock market from July 1926 until December 2023. In contrast to earlier literature, I do not set a share price threshold for the inclusion of stocks. I show that also in this setting the ranking-induced attention has a causal effect on subsequent returns. Setting a share price threshold still has a fundamental effect on the results: now the stocks that never appeared in winners and/or losers underperform even worse in many cases. I show that most of the effects from the extreme returns and rankings disappear in two months as I assess the third-month performance of the portfolios. Some of the returns are partially affected by illiquidity, but it is not a key driver behind the findings. One interesting finding is that reasonably attractive returns of a Winner-Minus-Loser long-short strategy are only available when measured with open prices. My key results are robust across shorter subperiods of time.