Winner-loser effect

A winner loser-effect is a correlation between past and future performance. In an investment context, the commonest effect for which there is some evidence is that good performers do too well in the short term, which is naturally followed by a period of under-performance as this is reversed.

A winner-loser effect is a longer term effect than momentum, so is perfectly consistent with it. Some models of investor behaviour predict both a momentum effect in the short term and a winner-loser effect in the long term.

The evidence for the winner-loser effect not conclusive, but there are a number of studies which show empirical evidence. For example, there is evidence of a winner-loser effect for some types of shares in UK markets, and that they reflect the behaviour of certain types of investor.

The commonest explanation of the winner-loser effect is that investors over-react to news. The value effect can be explained in a similar way, and this does seem to be behavioural factor that has a significant effect on markets.

Copyright © 2005-2016