Price Momentum 9 P a g e Long run reversals are an outcome of the same investor

Price momentum 9 p a g e long run reversals are an

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Price Momentum
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9 | P a g e Long-run reversals are an outcome of the same investor behavioral biases that are responsible for short-term momentum. Fama-French three factor model Reversals can be explained by the following three factors; market risk premium, Small minus Big, High minus low. Investor reaction to news events Reversals are a result of investors’ reaction to news events. Tax-based trading in January Long-Run reversals for loser-stocks are prominent in January. The consistent reversals of winners is attributed to capital gains lock-hypothesis, which says that investors holding stocks that have accumulated capital gains require a premium to trade those stocks. Because capital gains are taxed when realized, investors reluctant to sell winner unless compensated. DIFFERENTIATING THE MONETARY ENVIRONMENT These studies show evidence that expansive monetary environments are associated with higher equity returns, while restrictive monetary conditions tend to coincide with the lower returns. Measure of the monetary environment based on two monetary policy indicators: Changes in the federal funds rate Changes in the Fed discount rate The monetary environment is classified as expansive if both monetary policy measures are consistent in signaling expansive conditions. A restrictive environment when either measure signals restrictive conditions
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