[I present evidence of predictability in a sample constructed to minimize concerns about time-varying risk premia and market-microstructure effects. I use filter rules on lagged return and lagged volume information to uncover weekly over-reaction profits on large-capitalization NYSE and AMEX securities. I find that decreasing-volume stocks experience greater reversals. Increasing-volume stocks exhibit weaker reversals and positive autocorrelation. A real-time simulation of the filter strategies suggests that an investor who pursues the filter strategy with relatively low transaction costs will strongly outperform an investor who follows a buy-and-hold strategy.]

Journal Article Filter Rules Based on Price and Volume in Individual Security Overreaction Get access Michael Cooper Michael Cooper Krannert School of Management Address correspondence to Michael Cooper, Krannert School of Management, 1310 Krannert Building, West Lafayette, IN 47907, or email: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 12, Issue 4, 2 July 1999, Pages 901–935, https://doi.org/10.1093/rfs/12.4.901 Published: 01 June 2015

We propose that fitted values from market-wide regressions of firm returns on lagged firm characteristics provide useful benchmarks for assessing whether average returns to certain stocks are abnormal. To illustrate, we study eight documented events with abnormal returns, including credit rating and analyst recommendation downgrades, initial and seasoned public equity offerings, mergers and acquisitions, dividend initiations, share repurchases, and stock splits. We show that the apparently abnormal returns in the months after these events are substantially reduced or eliminated when compared to characteristic-based benchmarks. Characteristic-based benchmarks perform better in explaining post-event returns than do recent four- and five-factor models. Received September 19, 2016; editorial decision February 16, 2018 by Editor Andrew Karolyi.

We show that positive flows to active mutual funds with high recent returns partially reverse at longer horizons. This outcome is robust across a broad range of alternative specifications. Reversal occurs from greater outflows associated with high prior returns, not reduced inflows. We test theories to explain the reversal: investment life cycles, tax loss selling, and a behavioral “disappointment” hypothesis based on investors’ overreaction to positive returns. While both tax loss selling and short investor life cycles can contribute, the evidence supports a role for investor disappointment, whereby investors redeem their capital when return performance fails to meet expectations.