| Investors subject to reference dependence and mental accounting tend to make decisions based on the unrealized losses and gains relative to a reference point, and behave consistently with the disposition effect. In this paper, I focus my study on stocks' capital returns distribution, which is a distribution of each stock that represents the relative capital gains/losses of all shareholders during a target time period. Empirical evidences show the mean value and the skewness of stock's capital returns distribution play significant roles in forecasting future performance. For stocks with a negative mean value of the distribution, the only significant parameter is the skewness, while for stocks with positive mean, that parameter is the mean. This finding suggests an investment strategy taking advantage of the capital returns distribution may generate significant capital returns. I name stocks with lowest skewness among those having negative mean as losing stocks and name stocks with the largest positive mean values as winners. Running horse-race of buy-winner portfolio and short-loser portfolio after a holding period varying from one month to two years gives us a total of twelve investment strategies examined in this paper. There is an inverted U shape in the cumulative portfolio returns. Both the short-loser and buy-winner strategy beat the market in short- and medium-term, and generate significant abnormal returns for investors. But after two years of the portfolio formation, the profitability of strategies tested in this paper dissipates. |
