Title: Short-term stock price momentum, long-term stock price reversal and the effect of information uncertainty
Author: Walid Saleh, Orouba Al Sabbagh
Department of Business, Arab Open University – Jordan Branch, P.O. Box 1339, Amman, Jordan.
Department of Statistics, P.O. Box 6697, Amman, 11118 Jordan
Abstract: Zhang (2006) investigated the role of information uncertainty in short-term Capital Assets Pricing Model (CAPM) anomalies and cross-sectional variation in stock returns. He provided evidence suggesting that ''investors tend to underreact more to new information when there is more ambiguity with respect to its implications for firm value''. Saleh (2007a) explored the overreaction hypothesis using data from the Amman Stock Exchange (ASE). In particular, he aimed to investigate the sensitivity of defining the duration of the formation period. He provided evidence of stock return continuation in the short and medium terms and stock return reversal in the long term. This paper aims to extend the paper of Saleh (2007a) by addressing whether the winner-loser anomaly can be explained by differences in information uncertainty. The paper concludes that controlling for information uncertainty mitigates the winner-loser effect especially for high-uncertainty stocks when cumulative excess returns are calculated over the short and medium terms. Furthermore, the paper concludes that information uncertainty has no significant effect on the winner-loser anomaly when cumulative excess returns are calculated over the long term. However, the paper shows that the long-term reversal is significant under the up-market conditions for the oldest firms, but not for the youngest firms.
Keywords: overreaction hypothesis; momentum effect; winner-loser effect; information uncertainty; reversal effect; Amman Stock Exchange; Jordan; short-term stock price momentum; long-term stock price reversal; share prices; capital asset pricing model; CAPM; cross-sectional variations; firm value; stock return continuation; stock return reversal; high-uncertainty stocks; excess returns; financial accounting; finance.
Int. J. of Accounting and Finance, 2010 Vol.2, No.1, pp.1 - 48
Available online: 02 Mar 2010