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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
    as

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    File URL: http://www.macrothink.org/journal/index.php/ber/article/view/7938
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    References listed on IDEAS

    as
    1. Pavel Bandarchuk & Jens Hilscher, 2013. "Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics," Review of Finance, European Finance Association, vol. 17(2), pages 809-845.
    2. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    3. repec:hrv:faseco:30728041 is not listed on IDEAS
    4. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    5. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    6. Clifford S. Asness & Tobias J. Moskowitz & Lasse Heje Pedersen, 2013. "Value and Momentum Everywhere," Journal of Finance, American Finance Association, vol. 68(3), pages 929-985, June.
    7. Jiang, Danling, 2006. "Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns," Working Paper Series 2006-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Statistical arbitrage; momentum; Stock comovement; Investor sophistication; Earnings smoothing;

    JEL classification:

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

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