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Earnings Smoothing, Momentum and Statistical Arbitrage: Global Evidence

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  • G. Geoffrey Booth
  • Ayfer Gurun

Abstract

We employ the notion of statistical arbitrage to investigate the relationship between earnings smoothing and returns from momentum trading of stocks and explore the role that the level of investor sophistication may play in the smoothing-return calculus. To do so, we exploit the observation that both earnings smoothing and momentum profits are related to the cross-sectional variation in returns. We analyze the relevant data of 25 developed and emerging economies. Our results confirm the proposition that momentum profits as indicated by statistical arbitrage measures are inversely related to earnings smoothing but only in those markets where investors are more sophisticated and are able to take advantage of liquidity traders, who are often uninformed.

Suggested Citation

  • G. Geoffrey Booth & Ayfer Gurun, 2015. "Earnings Smoothing, Momentum and Statistical Arbitrage: Global Evidence," Business and Economic Research, Macrothink Institute, vol. 5(2), pages 48-65, December.
    • Handle: RePEc:mth:ber888:v:5:y:2015:i:2:p:48-65
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    References listed on IDEAS

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    More about this item

    Keywords

    Statistical arbitrage; momentum; Stock comovement; Investor sophistication; Earnings smoothing;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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