Does long-term disequilibrium in stock price predict future returns?

Jungshik Hur () and Vivek Singh ()

Review of Quantitative Finance and Accounting, 2013, vol. 41, issue 4, 753-767

Abstract: We propose a trading strategy based on error correction term (ECT), the residuals from the cointegration relation between the levels of security and the market portfolio. We find that buying stocks in the top 10 % ECT and selling stocks in the bottom 10 % ECT generates 1.09 % a month for 6-month holding period over 1965–2005. The monthly return increases to 1.57 % when the above trading strategy is applied to stocks with insignificant cointegration with the market portfolio. This profit is robust to three and four factor models. Moreover, this profit is neither driven by small and illiquid stocks nor is the result of any inherent positive serial correlation. Copyright Springer Science+Business Media New York 2013

Keywords: Stock returns; Cointegration; Market efficiency; G12; G14 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11156-012-0331-y

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