A New Model Based On The Neoclassical Theory Of Investment Essays

1056 Words Apr 25th, 2016 5 Pages
Firm-specific monthly data for this study were obtained from the CRSP. The authors propose and test a new model based on the neoclassical theory of investment. Specific data on stocks were examined to find if the neoclassical investment model was profitable. The sample covered stock returns from 1963 to 2012 and included only the firms with positive sales, positive assets, and positive market values. The findings show that the neoclassical investment model was capable of clarifying return continuation, risks related to momentum, and relationship between firm characteristics and price momentum. Results of this study contributed to the literature by proving that developing new models, such as based on the neoclassical theory can outperform the traditional momentum model. The relationship between risk and momentum is an unusual finding since most research has shown that risk is not related to momentum. Additionally, the authors show that the momentum managers’ irrationality comes into play when they align their investment strategies with costs. The result aligns with the positive feedback strategy of behavioral finance. The irrationality factor found by the authors could explain why price momentum existed. This conclusion might be useful to do a comparative analysis between price momentum and buy and sell strategy of efficient market hypothesis. The authors recommend future research on extending the model to include book-to-market and international factors.…

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