Returns to Buying Winners and Selling Losers

Abstract: The argument put forward in this paper is that stocks listed on the Stockholm Stock Exchange, from 1993 to 2016, exhibits return continuation over an intermediate-horizon. The best performing strategy, which selects stocks based on the previous six months’ returns and holds the portfolio for three subsequent months, yields an average monthly return of 2.33%. Moreover, results are robust after risk-adjustment. The Capital Asset Pricing Model, as well as the Fama and French three-factor model, produce qualitatively incorrect predictions that losers are riskier, which consequently increases the risk-adjusted return rather than decreasing it.