Essays on financial market anomalies and Investment strategies

Sammanfattning: This dissertation consists of three papers on momentum strategy and the comovement of stock returns.Momentum Crash Management studies the fat-tailed distribution of momentum strategy’s return and the predictability of momentum crashes. Momentum strategy has both high average returns, and Sharpe ratios. At the same time, however, it suffers from very negative skewness and sometimes experiences crashes. This paper suggests a dynamic momentum strategy with better performance than existing methods, while also taking into account the implantation cost of the strategy.Over or Under? Momentum, Idiosyncratic Volatility and Overreaction investigates the behavioral explanations of the momentum effects in the equity market. Several studies have attributed the high excess returns of the momentum strategy in the equity market to investor behavioral biases. However, whether momentum effects occur because of investor underreaction or because of investor overreaction remains an open question. Using a simple model to illustrate the link between idiosyncratic volatility and investor overreaction, this paper presents evidence that supports the investor overreaction explanation as the source of momentum effects. Cyclicality of Price Comovement and Firm Investment studies the effects of the firm investment on stock price comovement. Studies have shown that stock price comovement is higher in the recessions than in expansions and it is negatively correlated to the level of information about the stock in the market. This paper uses firm’s capital and R&D investment deviation from average industry level of investment as a measure of information, and find that this measure has negative effects on the stock’s comovement. Moreover, it provides evidence of differential effects of the investment deviation on stock’s comovement in the recession and expansion.