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Rio de Janeiro
2011
Marcelo Paranaguá de Vasconcelos Teixeira
Rio de Janeiro
2011
Ficha catalográfica elaborada pela Biblioteca Mario Henrique Simonsen/FGV.
CDD – 332.6322
Marcelo Paranaguá de Vasconcelos Teixeira
Rio de Janeiro
2011
RESUMO
1 INTRODUCTION…………………………………………………………………………………… 7
2 LITERATURY REVIEW……………………………………………………………………………. 10
2.1 The Value Strategy………………………………………………………………………………. 10
2.2 The Momentum Strategy…………………………………………………………………….. 11
2.3 The Value and Momentum Combination Strategy (Combo Strategy).. 11
3 METHODOLOGY…………………………………………………………………………………… 13
3.1 Data…………………………………………………………………………………………………….. 13
3.2 Portfolio Construction…………………………………………………………………………. 14
3.3 Adjusting the performances for the risk……………………………………………… 15
3.4 Correlation………………………………………………………………………………………….. 17
4 RESULTS………………………………………………………………………………………………. 19
4.1 Performance……………………………………………………………………………………….. 19
4.2 Risk-adjusted Performance………………………………………………………………….. 23
4.3 Correlations………………………………………………………………………………………… 29
4.3.1 Ibovespa……………………………………………………………………………………………… 29
4.3.2 Stocks Correlation……………………………………………………………………………….. 30
4.3.3 Foreign Capital Flow……………………………………………………………………………. 32
5 CONCLUSIONS……………………………………………………………………………………… 33
REFERENCES…………………………………………………………………………………………………. 35
APPENDIX…………………………………………………………………………………………………….. 37
7
1. INTRODUCTION
The field of behavioral finance comes as a new approach for financial markets,
arguing that some phenomenon can be better explained if the agents are not
considered fully rational. The literature of the area shows that a lot of aspects of the
investors’ actions that seem to point to rationality deviations can be observed through
empirical evidence.
Other aspects of the behavior of the investors are connected to the buying and
selling decisions. Shefrin and Statman (1985) observe that the agents avoid selling
stocks when they worth less than the value for which they were bought, calling it
“disposition effect”, and Odean (1998) observes that the agents are more willing to sell
a stock when its price is higher than the price they paid for it.
Regarding the buying decision, Odean (1999) noticed that the agents’
preferences are split between stocks with recent gains and stocks with recent losses,
but in both cases they prefer the extreme cases. This phenomenon may be explained
by an “attention effect”, because some agents may just not pay attention to certain
stocks until they have some kind of abnormal behavior, such as great gains or losses.
Barberis and Thaler (2003) argue that the reason for these rationality
deviations is that the agents generally base their decisions on a limited number of
heuristic principles, which simplify complex tasks of probability evaluation and price
prediction, and can lead to systematic ad serious mistakes.
These irrational behavior from the non-rational agents, who are called “noise
traders”, lead to mispricing on the markets, and the traditional finance theory argues
that the rational agents should recognize the opportunities of arbitrage, correcting the
mispricing and excluding the noise traders from the market. However, there is a lot of
empirical evidence of persisting mispricing, due to arbitrage limits, mostly connected
to the short-term investment horizon of the agents, as argued by Shleifer (2000).
So, the existence of irrational behavior created space to a new research area, in
which the authors try to predict the return of the stocks based on past information,
relying on the known behavioral pattern of the agents to construct the strategies.
With this in mind, in this work we analyze the performance of value and
momentum strategies, as well as a combination of both strategies, on the Brazilian
9
stock market, examining their behavior during the last decade (from 2001 to 2010) in
order to rank the strategies. A special attention is given to the 2008 crisis.
The results show during the 2008 crisis/recovery the combo strategy had the
best performance, but considering the entire period the value strategy performed
better than the combo, even after adjusting by the risk. Besides, investment horizon
analysis shows that the strategies’ ranking may change with different horizon choices.
2. LITERATURE REVIEW
The “value” strategy is based on idea that the existent mispricing on the market
will be corrected. It consists on, based on some value signal, buying stocks with a
“good” signal and selling stocks with a “bad” signal. An example of a value signal is the
book-to-market (BM) ratio, which is in fact one of the most used value signals. The
idea is that if a price is below its fundamental level, it should increase, and similarly, if
a price is above its fundamental level, it should decrease.
Fama and French (1992), studying the US stock market, found that the
portfolios composed of stocks with high BM had higher average monthly return then
the portfolios composed by stocks with low BM, and that this abnormal return wasn’t
justified by a higher risk.
Lakonishok, Shleifer and Vishny (1994) also found that stocks with high BM
continuously present higher returns in comparison with stocks with low BM, and the
risk could not justify the difference of returns. They found yet that these results were
valid for both “bear” and “bull” market periods.
Analyzing the Brazilian case, Braga and Leal (2000) found that portfolios of
stocks with high BM had much better performances than portfolios of stocks with low
BM, even after adjusting the performances by the portfolios’ risk.
The “momentum” effect is the relation between an asset’s return and its recent
performance history. The momentum strategy consists on buying stocks with high
momentum (that is, high past returns) and selling stocks with low momentum,
believing on the continuity of the trend.
For the Brazilian market, Lemos and Costa Jr. (1997) found reversal effect
instead of a momentum effect, where the stocks with low momentum had better
performance than the stocks with high momentum.
The explanation for this result is that the negative correlation between value
and momentum strategies makes the volatility of the combo strategy smaller than the
volatilities of the value and momentum strategies. Adding to that their high expected
returns, it makes a simple equal-weighted combination of the two a powerful strategy
12
that produces a significantly higher Sharpe ratio than the ones of the individual
strategies.
They show that the combo strategy has a higher Sharpe ratio than both
individual strategies for four analyzed markets: United States, United Kingdom,
Continental Europe and Japan.
13
3. METHODOLOGY
3.1. Data
The stock sample used to compute the performance of value and momentum
strategies consists of 1140 stocks negotiated at Bovespa, from July of 2000 through
December of 20101. From the “Economatica” system, we collected the stocks’ daily
closure prices, book-to-market information2, and quarterly average traded volume.
Since the signal used in the value strategy (BM) is different from the one used
in the momentum strategy (past returns), specific filters were created for each
approach in order to construct the portfolios: for the value strategy, in each
subsample, the stocks with at least one BM information in the past six months were
kept; for the momentum strategy, in each subsample, the stocks with six months of
past return history were kept.
Besides these individual filters, two other ones were created that were
common to both strategies. First, to avoid abnormalities on the returns, the stocks
with price smaller than R$ 0.1 at some point of a subsample were excluded from it.
Second, to avoid liquidity problems, all stocks with an average traded volume smaller
1
Bonomo and Dall'Agnol (2003) show that the efficiency of the Brazilian stock market seems to have
improved since the Brazilian macroeconomic changes in the 90’s, which may affected the returns of the
these strategies. So, in order to avoid these changes to affect the results, we chose to analyze the
performance of these strategies based only on last decade information, from 2001 to 2010.
2
As a proxy to book-to-market, it was used the P/PVS ratio (price / patrimonial value per stock).
14
than R$ 300,000.00 in the last quarter were excluded from that subsample. After all
the filters, we end up with on average 204 and 216 available stocks to be used in the
value and momentum portfolios, respectively.
Once the stocks to be used have been selected, we followed the methodology
of Asness, Moskowitz and Pedersen (2009) to construct the value, momentum, and
combo portfolios and compute their returns. Zero-cost portfolios were constructed for
each strategy and each period, simulating an investor that based on the signals would
create a portfolio, keep it for six months3, and then rebuilt the portfolio based on the
new signal information. The idea is to create a unique portfolio’s construction
algorithm, but keeping the portfolio a dynamic characteristic.
It is worth mentioning that the goal here is not to come up with the best
predictors of the returns of the stocks, but to introduce a simple approach that should
give good results and doesn’t demand a constant attention to the portfolio, since the
investor will keep it for six months without making any changes.
For the value strategy, the used signal was the last BM information available for
each stock. We sorted the stocks based on their BM, split them in three groups4 (high,
middle, and low), and constructed zero-cost portfolios that go long stocks with high
BM and short stocks with low BM. This way, we are using on average approximately
136 stocks (2/3 of 204) on the value portfolios.
3
Asness, Moskowitz and Pedersen (2009) used 12-month signal information to construct their
portfolios, and keep them for twelve months, but due to the reduced database we are using (compared
to the databases of other papers in the literature), we chose to make new portfolios in every 6 months,
so that we could have more portfolio return information to analyze.
4
If the number of available stocks is not divisible by three, the middle group will be slightly bigger, so
that the high group will always have the same number of stocks as the low group.
15
where is the number of stocks composing the portfolio at time (after the
exclusion of the middle group), and are the weights, which clearly sum to zero,
representing a zero-cost long-short portfolio. Notice that the weights were chosen
such that the overall portfolio is scaled to R$1 long and R$1 short.
For the momentum strategy, we used as signal the 6-month past cumulative
raw return of the stocks, skipping the most recent month’s return5, which was called
MOM2-6. Then we did the same thing we did for value: sorted the stocks based on
their MOM2-6, divided them in three groups (high, middle, and low), and constructed
zero-cost portfolios that go long stocks with high MOM2-6 and short stocks with low
MOM2-6. So, the momentum portfolios are composed on average by 144 stocks.
The stock weighting methodology of the momentum portfolio is the same used
to the value portfolio, just replacing BM for MOM2-6.
5
Skipping the most recent month is standard in the momentum literature, due to a contrarian effect
observed in the returns at the one month level. For further information see Lo and MacKinaly (1990).
16
where is the return of the risky asset, is the return of a risk-free asset, and is
the volatility of this excess of return, i.e., the standard deviation of .
In our case, we are already dealing with zero-investment portfolios, selling the
low-signal portfolios to buying the high-signal ones. So, the Sharpe Ratio used here is:
where is the return of the strategy (value, momentum, or combo), and is the
volatility of the strategy. Note that already is, by definition, an excess of return (the
spread between the high-portfolio’s return and the low-portfolio’s return), and is the
volatility of this excess of return.
Levy (1972) shows that the SR tends to change with different investment
horizons. He also shows that as long as the intended investment horizon is different
from the horizon used to compute the ratio, the Sharpe ratio exhibits systematic
biases and any asset-allocation decisions based on it will be misleading.
Looking at our case, since in these strategies the investors always keep their
portfolios for at least six months6, there is no reason for us to calculate the SR using
daily or monthly data. So, we will only use data horizons equal or multiples of
6
Note that even though an investor changes his portfolio in every six months, according to the
previously presented methodology, his investment horizon can be bigger, because he can keep investing
on the strategy for other semesters.
17
semesters to compute it. Also, in order to check if the SR value changes over different
horizons, we will compute the SR using different horizons, and annualize them to
compare the results.
Following this idea, Lin and Chou (2003) argue that because investors differ in
their risk attitudes and in holding horizons, it is unreasonable to evaluate portfolio
performance based on one single investment horizon. So, as practical implementation
of the SR is reasonable only if the intended investment horizon equals the holding
period of the returns used to compute the ratio, they propose that plotting a graph of
Sharpe ratio against the investment horizon may be more appropriate for investors
with multiyear investment horizons.
3.4. Correlations
So, after computing the performances of the value, momentum, and combo
strategies, we analyze the correlation between these performances and the three
other variables: (i) the Ibovespa, (ii) the correlation among the available stocks, and (iii)
the foreign net capital flow in the Brazilian stock market.
The Ibovespa series was also collected from the “Economatica” system, from
January of 2001 through December of 2010. It was used the daily quotation of the
index, so that it would be possible to compute de daily returns, and then calculate the
correlation between them and the returns of each one of the strategies presented
above.
18
To measure the correlation among the available stocks (i.e., the stocks that
“survived” the filters) we simply take the mean of the all the correlations between
pairs of stocks. Said in another way, this is the mean of all elements that
are under (or above) the principal diagonal of the correlation matrix of the available
stocks. From now on we use the letter to represent this correlation measure.
For the foreign net capital flows in the Brazilian stock market, we used a daily
series from January of 2006 through December of 2009. The reason for the reduced
period of the database is simply the lack of additional available data, but at least this
window includes both pre- and post-crisis periods. The daily correlation between this
variable and the strategies’ returns over that period was computed.
19
4. RESULTS
4.1. Performance
On figure 1 we can see the performance of the value, momentum and combo
strategies over the last decade, as well as the performance of the Ibovespa.
The cumulated return of the value strategy (541.97%) was much higher than
the return of the momentum strategy (75.38%), and consequently higher than the
combo’s return (308.18%), since it is a combination of those two. It was even much
20
higher than the Ibovespa’s cumulated return (349.30%), which is not a zero-
investment portfolio7.
The analysis of the performance of the value strategy gets even more
interesting if we look just for the 2008-2010 period, the one of most economic
instability on the decade, comprehending the 2008 crisis and its recovery. On figure 2
it can be seen that during the peak of the crises, when the Ibovespa suffered a huge
devaluation, the value’s cumulated return not only didn’t decreased but even
increased a little bit. And during 2009, when the economy was recovering from the
crisis, the value strategy had a great performance, reaching a cumulated return of
about 80% on the second and third quarters of that year.
The reasons for this outstanding result can be noticed by analyzing the
separated performances of the value-high and value-low portfolios, which are shown
in figure 3. Studying the behavior of the semiannual performances of these portfolios,
we see that during the second semester of 2008 both portfolios had a great
depreciation, but the intensity was very similar, resulting in a stable performance of
7
One cannot directly compare the return of a zero-investment strategy with the gross return of
Ibovespa, since it is not a zero-cost portfolio. In order to do so, one should compute de difference
between the return of the Ibovespa and the return of a risk-free asset. In the Brazilian literature it is
common to use the CDI (Interbank Deposit Certificate) as a risk-free asset, whose return was 314.70%
on the period. So, the return of that zero-investment strategy would have been only 34.6%.
21
the value strategy, which is spread between those returns. In the following year, the
value-high portfolio had a much higher cumulated return than the low-value portfolio,
resulting on the great increase of the value strategy’s cumulated return, as we saw on
the last figure.
The explanation for this behavior could be explained by the idea behind the
construction of the value portfolio. When one buys stocks with high BM, one expects
that the market value of these stocks will rise, and similarly, when one sell stocks with
low BM, one expects that the prices will be corrected by the market, decreasing. But
the 2008 crisis was characterized by a global loss of confidence on book information,
so the market failed on correcting the stocks mispricing, and both the high and low
portfolios had similar devaluation.
When the confidence crisis was gone, not only the BM information became
relevant again, but the value effect was amplified by the recovery of the economy,
resulting on the great performance of the value-high portfolio, and therefore, of the
value strategy. This value effect amplification could be explained by two factors: first,
the crisis make investors pay more attention to market mispricing, implying more
efficiency on its correction; second, due to the crisis, some prices were way too low
22
compared to the book information available, so that the correction of these mispricing
would imply in return much higher than usual.
In the following semester, on the other hand, the momentum-low portfolio had
a huge cumulated return, three times higher than the momentum-high portfolio,
leading to the worst semiannual performance of the momentum strategy on the entire
decade. The reason for this behavior may be at the huge devaluation of stocks on the
previous semester, followed by a reversal effect on the following period, when the
23
economy was recovering from the crisis. The market rapidly corrected the mispricing
on the economy, in a way that the stocks with lowest returns over the past six months
had the highest returns on the first semester of 2009. So, it was the arbitrage of the
market that corrected the mispricing and provoked this reversal effect, making the
momentum strategy to perform so badly.
When we turn our attention to the combo strategy, we can see on figure 2 that
it performed well during the crises, with a good stability, and even better after the
crises, with positive cumulative returns. That is, even though the momentum strategy
had a bad performance, the great performance of the value strategy more than
compensated it, making the combo strategy to perform well.
If an investor would look only to the past cumulated return of the strategies
when choosing an investment strategy, from figures 2 and 3 we can see that the value
strategy would be the chosen one, since it had the best performance either between
2001 and 2010 or from the 2008 crisis on. Moreover, by construction, the combo
strategy would never have the highest cumulated return, since it is the average of the
other two strategies, so the investor would never choose it.
However, the investor is not interested in the past return, but in the future
return, which is uncertain, and a higher volatility will certainly make it more uncertain.
So, when choosing the best investment strategy, the agent should also analyze the
volatility of the past returns, and that’s when the combo strategy becomes more
attractive.
Figure 5 shows the semiannual returns of the value and momentum strategies,
and we can clearly see that they are negatively correlated8 (-0.23). This negative
correlation is responsible for a smaller volatility of the combo strategy, if compared to
value and momentum strategies, making its portfolio less risky than the other two.
8
The correlation between the daily returns of the value and momentum strategies is also negative and
very similar to that (-0.22).
24
This way, since the value strategy has the highest past cumulated returns, and
the combo strategy has the smallest risk, we need to adjust the performance of the
portfolios by their risk to rank the strategies. Asness, Moskowitz and Pedersen (2009)
adjusted the cumulative returns of value, momentum and combo strategies for four
markets (US, UK, continental Europe, and Japan) by their monthly volatility. The results
can be seen in the figures of the appendix.
Following this idea, we did a similar exercise, but instead of using the monthly
volatility, it was used the semiannual volatility to adjust our series of cumulative
return, due to the argumentation presented in section 3.3. The results can be seen in
figure 6.
9
See the graphs on the appendix.
25
correlation between value and momentum is very strong (-0.63, -0.59, -0.50, and -0.52,
respectively), in the Brazilian market it is -0.23. This way, the decrease on the volatility
of the combo strategy on the Brazilian market wouldn’t be as large as it appears to be
on the cases analyzed by those authors, which made this strategy less powerful here.
Comparing these four markets with the Brazilian market, it can also be noticed
that the Brazilian market is more similar to the Japanese market than the others, in
which the value strategy has better results than the momentum strategy. Another
similarity is that for some periods the combo is better than the value, and sometimes it
is worse. This can be evidence that the period of analysis can interfere on the ranking
of the strategies, and to explore it in a deeper dimension, we also analyze the
performance of the strategies before and after the crisis, splitting the database in
before and after January 1st, 2008.
On the other hand, figure 8 shows the performances from January of 2008 to
December of 2010, adjusted by the semiannual volatility of the period. In this case, the
performance of the combo strategy is strictly better than the others.
26
This difference of results can be explained by the fact that from 2001 to 2007
the correlation between value and momentum is weak and positive (0.07), which takes
off the power of the combo portfolio, while from 2008 to 2010 the correlation
between value and momentum is negative and very strong (-0.74), which reduces the
combo volatility and consequently improves its risk-adjusted performance.
These results of the performances before and after the 2008 crisis indicate that
the combo strategy in the Brazilian market was more efficient during the most instable
period, as it was expected.
However, although the analysis of these last two figures is important to see
what happened before and after the 2008 crisis, the results should not be generalized
for all crises, since there is only one great crisis in this sample. Moreover, we are
looking only for past results, comparing pre- and post-crisis results, and it is hard for an
investor to predict exactly when a crisis will begin.
Also, according to what was argued on section 3.3, this analysis can change
according to the chosen investment horizon, since it will change the volatility of the
returns. So, the previous results of this subsection are only completely valid for an
investor that has an investment horizon of six months.
So, the analysis of the performance’s graphs can be useful on explaining some
events, or to capture some details, but it is not the best way to rank the strategies,
since it is not completely objective and would require redoing all these analyses when
changing the investment horizon.
Hence, for this purpose we will compute and compare the Sharpe ratios (SR),
which is an objective way to rank zero-investment strategies. As we explained on
section 3.3, the SR also suffers from the “investment horizon dilemma”, and in order to
show it is true, table 1 presents the annualized10 SR of the three strategies for different
investment horizons.
10
The Sharpe ratios were annualized according to the methodology of Sharpe (1994).
28
Note that with a horizon of one semester, the value strategy has the highest SR,
but with a horizon of 6 or 8 semesters the combo strategy has the highest SR, which is
an evidence of the existence of that dilemma.
However, differently from what happens on the graphs’ analysis, this problem
is simpler to be solved when we are dealing with the SR. All we need to do is to
compute the SR for different horizons (which is much simpler than plotting all those
graphs for each different horizon) and rank the strategies for each horizon. Then, all an
investor needs to do is to choose his investment horizon, and the strategy’s choice will
be made. Plotting a graph of the annualized SR over different horizon, as Lin and Chou
(2003) suggested, makes the visualization easier, as showed in figure 9.
So, after ranking the strategies over different horizons in the Brazilian stock
market, we can see that the value strategy is the best option if the investor wants to
invest for up to five semesters, and from six to ten semesters of investment horizon
the combo strategy is more attractive. The momentum strategy alone seems to never
be the best option.
29
It is valid to mention that, due to the small size of the used sample, as the
chosen investment horizon gets bigger, the computed SR becomes less robust, since
the number of observations gets smaller. For example, using six-month overlapping
data, for an investment horizon of one semester we have 20 observations to compute
the SR, while for a six semesters horizon we have only 15 observations, and for a ten
semesters horizon we have only 11 observations.
Then, our results show that for investment horizon of one to five semesters the
value strategy should be the best option for the investor, while for investment
horizons of six to ten semesters the combo strategies seems to be better, although this
last result may not be very robust.
4.3. Correlations
4.3.1. Ibovespa
Analyzing the entire period, the correlation between the semiannual returns of
the Ibovespa and the value strategy was positive, but when we split the period in
30
before and after 2008 we see that this positive correlation is due to the post-crisis
period high correlation, since the correlation of the pre-crisis period was near to zero.
When we look to the correlation with the momentum strategy, it is quite the
opposite of the previous one, as expected, since value and momentum are negatively
correlated. Comparing the values of the correlations on pre- and post-crisis periods,
we can see that both value and momentum strategies were more correlated
(positively or negatively) to the Ibovespa during the instable period (this was especially
true to the value strategy), which made the combo strategy practically uncorrelated
with the Ibovespa during the crisis.
We can see that for most of the period the value of stood between 0.12 and
0.17, but during the peak of the crisis it reached 0.20, getting ever higher on the
following semester (0.23), while the economy was already recovering from the crisis,
as showed on figure 1.
more intense than its impact on the value strategy, leading also to a negative
correlation between and the combo strategy.
We should be careful not to generalize these results by simply saying that “the
most correlated the available stocks, the higher the return of the value strategy, and
that the more diversified the portfolio, the higher the returns of the momentum and
combo strategies”, since significant changes on only happened during the 2008
crisis/recovery, a single event in our sample.
In fact, the analysis made in section 4.1 shows that the performances of both
value and momentum strategies stood practically stable during the second semester of
2008, when was very high, and had very extreme (and opposite) results on the first
semester of 2009, when achieved its highest value. So, due to the relatively “good
behavior” of and the performances of the strategies for the rest of the period in
comparison to the first semester of 2009, we may suspect that the correlation
between and the performances was strongly affected by this extreme observation.
Then, we can’t use these results in order to make statements about how
portfolio diversification affects the performances of those strategies in general. Maybe
we could try doing that if we had a larger sample, with more crises, but even then it
32
would not be very useful information for the investor, since the strategies by
construction don’t allow the investor to try to diversify the portfolios.
Therefore, because of the observed pattern of and the small sample we have,
the results of this sub-section are only valid to show how the correlation among the
stocks was affected by the 2008 crisis, which helps illustrating the affect of the crisis on
the performances of the strategies.
So, we can say that the 2008 crisis increased the correlation among the stocks,
and in that scenario (of global crisis of confidence followed by recovery) the value
strategy had a great performance, while the momentum strategy had a bad
performance.
Finally, we examined the correlation between the daily foreign capital flow into
the Brazilian market and the daily returns of the value, momentum, and combo
strategies, which were all very close to zero (-0.05, 0.02, and -0.02, respectively),
suggesting that this variable does not have significant impact on the performance of
these strategies.
33
5. CONCLUSIONS
This result is different from the results of Asness, Moskowitz and Pedersen
(2009), where the combo strategy had the best risk-adjusted performance in the US,
UK, Continental Europe and Japan. This finding could be explained by the weaker
negative correlation between value and momentum strategies on the Brazilian market
(-0.23), if compared this correlation on those markets (always stronger than -0.5),
which would lead to a less powerful combo strategy.
After computing the Sharpe ratio of the strategies for different investment
horizons, we found that the strategies’ ranking could change with the chosen horizons.
The SR analysis showed that the value strategy is the best option for horizons of 1 to 5
semesters, but the combo strategy may be better for horizons of 6 to 10 semesters,
although this last result is not as robust as the first one.
We also found that the momentum strategy on the Brazilian market doesn’t
appear to be a good option for the investor, if compared to the other two strategies.
This result is coherent with Bonomo and Dall'Agnol (2003), who did not find a
momentum effect on the Brazilian market, but instead found a reversal effect.
the post-crisis period, while for the momentum strategy this correlation was
consistently negative, also with a stronger relation on the post-crisis period. The
momentum strategy correlated very poorly with the Ibovespa in the entire period.
About the correlation among the stocks, its correlation with the performance of
the value (momentum) strategy was positive (negative), but probably due to the
period of recovery from the crisis.
Finally, we found that the daily foreign capital flow into the Brazilian market
has no impact on the performance of the value, momentum or combo strategies.
35
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SHEFRIN, H. and M. Statman (1985). “The disposition to sell winners too early and ride
losers too long”, Journal of Finance, v. 40, pp. 777−790.
APPENDIX
Here are presented some graphs from Asness, Moskowitz and Pedersen (2009).
The graphs show the cumulative returns to value, momentum, and a 50/50
combination of value and momentum strategies among individual stocks in four
markets: U.S., U.K., Japan, and Continental Europe. In the last graph we have an equal-
weighted combination of all stock selection strategies. Also reported on each figure are
the annualized Sharpe ratios of each strategy and the correlation between value and
momentum in each market. They used monthly returns to compute both the Sharpe
ratios and the correlations.
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