Time-Varying Risk Premia and the Returns to Buying Winners and Selling Losers: Caveat Emptor Et Venditor

96-2, The Charles A. Dice Center for Research in Financial Economics Working Papers Series

Posted: 18 May 1998

See all articles by George Andrew Karolyi

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management

Bong-Chan Kho

Seoul National University, Business School

Date Written: Undated

Abstract

This paper re-examines the profitability of relative strength trading strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past. We study the changing risk patterns of the stocks that comprise this investment strategy and argue that the profits could represent appropriate compensation for the risk assumed under a simple equilibrium model of asset pricing with time-varying conditional expected returns and risk. We implement our tests using a robust procedure based on bootstrap methodology. Hundreds of new series for individual stock returns are simulated from the equilibrium asset pricing model. The trading rules are applied to these new returns series and are compared with results from the actual series. The results show that the simulated spreads from buying winners and selling losers can often be at least as large as those of the actual series, even after controlling for risk within size- and beta-based subsamples.

JEL Classification: G12

Suggested Citation

Karolyi, George Andrew and Kho, Bong-Chan, Time-Varying Risk Premia and the Returns to Buying Winners and Selling Losers: Caveat Emptor Et Venditor (Undated). 96-2, The Charles A. Dice Center for Research in Financial Economics Working Papers Series, Available at SSRN: https://ssrn.com/abstract=7467

George Andrew Karolyi (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Bong-Chan Kho

Seoul National University, Business School ( email )

607 LG Hall
1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
+82-2-880-8798 (Phone)
+82-2-876-8411 (Fax)

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