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Is Momentum Really Momentum
Abstract
Momentum is primarily driven by firms' performance twelve to seven months prior to portfolio formation, not by a tendency of rising and falling stocks to keep rising and falling. Strategies based on recent past performance do generate positive returns, but are less profitable than strategies based on intermediate horizon past performance, especially among the largest, most liquid stocks. The performance of two types of strategies are correlated, however, even when explicitly constructed to be neutral with respect to the past performance characteristic on which the other strategy is formed, especially over the second half of the CRSP sample. As a result, over the last forty years strategies based on recent past performance do not contribute significantly to the investment opportunity set of an investor already trading momentum based on inter-mediate horizon past performance and the three Fama-French factors. These facts are not particular to the momentum observed in the cross-section of US equities. Similar results hold for momentum strategies trading international equity indices, commodi-ties and currencies.
... Although most earlier works about CSMOM and CSCON effects focus on the U.S. market [20][21][22][23], a large body of studies find evidence of CSMOM or CSCON effects in other regions or markets, including the UK [24,25], Japan [26,27], Australia [28], China [29][30][31][32][33], etc. Moreover, the CSMOM and CSCON effects are also found in many asset classes [34,35], including stocks [33], funds [36,37], currency [38][39][40], and commodity [41,42]. In addition, the frequently employed procedure to construct zero-cost arbitrage CSMOM or CSCON portfolios via buying (selling) winner and selling (buying) loser, enlightens us to test one of practical implications in the AMH that arbitrage opportunities exist from time to time [2]. ...
This paper investigates the time-varying risk-premium relation of the Chinese stock markets within the framework of cross-sectional momentum and contrarian effects by adopting the Capital Asset Pricing Model and the French-Fama three factor model. The evolving arbitrage opportunities are also studied by quantifying the performance of time-varying cross-sectional momentum and contrarian effects in the Chinese stock markets. The relation between the contrarian profitability and market condition factors that could characterize the investment context is also investigated. The results reveal that the risk-premium relation varies over time, and the arbitrage opportunities based on the contrarian portfolios wax and wane over time. The performance of contrarian portfolios are highly dependent on several market conditions. The periods with upward trend of market state, higher market volatility and liquidity, lower macroeconomics uncertainty are related to higher contrarian profitability. These findings are consistent with the Adaptive Markets Hypothesis and have practical implications for market participants.
... Although the majority of earlier studies effects focus on the U.S. market [1][2][3][4], a large body of research reported evidence of the momentum (contrarian) effects in other regions or markets, including the UK [5,6], Japan [7], Australia [8], China [9][10][11][12][13][14], to list a few. Moreover, the momentum and contrarian effects are also found in many other asset classes [15,16], including funds [17,18], currencies [19][20][21], and commodities [22,23]. ...
This paper concentrates on the time series momentum or contrarian effects in the Chinese stock market. We evaluate the performance of the time series momentum strategy applied to major stock indices in mainland China and explore the relation between the performance of time series momentum strategies and some firm-specific characteristics. Our findings indicate that there is a time series momentum effect in the short run and a contrarian effect in the long run in the Chinese stock market. The performances of the time series momentum and contrarian strategies are highly dependent on the look-back and holding periods and firm-specific characteristics.
... -The appropriate sizing of positions in portfolios (if in index management this problem does not arise considering the tracking of the benchmark in mixed stock-bond portfolios, or in the case of active management, this aspect can determine performance differences) (Grundy & Martin, 2001;Lesmond et al., 2004). -The lessons learned give capabilities to anticipate and adapt or adjust decisions, an essential aspect in the selection of the constitutive elements of portfolios, their weighting, timing aspects, including the creation of liquidity buffers in certain turbulent periods (Blitz et al., 2014;Novy-Marx, 2012). -An additional focus on the efficiency of trading processes, namely, the control of trading costs by avoiding or at least limiting aggressive strategies or the persistence of efforts to exploit specific events with informational asymmetries. ...
The recent multiple crises of the 2020–2023 imposed the integration of the concept of VUCA environments (volatility–uncertainty–complexity–ambiguity) at the level of the capital markets, as an indisputable reality. These processes have, in fact, led to major changes in the perception of the markets impacting the understanding of new problems, respectively, the action of the managers and the implementation of the portfolio management strategies. Managing portfolios in VUCA environments involves reconsidering portfolio management objectives that must be better adapted to investors’ requirements in a dynamic spectral context. Portfolio managers must now anticipate these demands and needs and design new strategies and products, better adapted to these changes. In addition, there are a number of problems specific to emerging markets: the lack of major essential market structures or dysfunctions (futures, options), the reduced liquidity of the capital market and the inconsistent structure of stakeholders, and insufficient or even lack of knowledge in the field of capital markets. In emerging markets, there are investment funds (open and closed) focused only on instruments listed in the first category of the stock exchange, respectively, treasury and high quality corporate bonds. The investment funds are generally oriented towards passive management, with only extremely few examples of strategic orientation towards active portfolio management. The lack of essential infrastructures (futures, options) is somehow compensated by the development of pension funds that are becoming major players with presence and performance in the markets. The number of retail investors remains extremely small, but the good news is given by the possibilities of further increase in the near future. The research methodology starts from the design, configuration, implementation, and interpretation of questionnaires addressed to investors, respectively, fund managers. Starting from the resulting conclusions, the future intentions regarding the active management of portfolios and the design of new products such as ETFs (exchange traded funds) or the implementation of new strategies are deciphered. To incorporate the dynamic aspects, the real options paradigm and the dynamic capabilities paradigm are also integrated. The possible contributions refer to deciphering the current aspects of portfolio management, understanding strategies and adaptation solutions, like portfolio rotation (growth-value-bonds), and understanding how to design products better adapted to current market conditions.
... Stock liquidity's informative effect on dividend payments of Chinese companies exmained by (Amedeo, 2015), Moreover, They investigatethe positive relationship between dividend payments and stock liquidity ,where information environment is opaque and conflict between shareholders and smaller investors is serious. Momentum is mostly driven by 12 to 7 months companies's performance before the portfolio formation, not by rise in trend and fall in stock continue to rise and fall examined by (Novy Marx, 2012). Positive returns are less generated by stratagies which are based on past performance and less profitable for past mid-horizon performance, particularly between larger liquid stocks. ...
The study analyzes the future stock returns affected by different sets of criteria in an emerging
market of Pakistan and importance of momentum strategy to predict future stock returns. Trading
strategies that buy past winners and sell past losers realize significant abnormal returns over the
period of January, 2009 to December, 2016. We construct 15 portfolios based on mentioned criteria.
Results show that high dividend paying companies in short & medium term follow the momentum
strategies while in long run might be followed contrarian strategy. Similarly, high medium and low
paying companies in long run do not follow momentum but in short and medium run they follow
momentum. As pointed out by (George li, 2016) that on future stocks and price momentum, dividend
payout ratio has a significant impact. Interestingly for the medium-run all securities of the different
sets of criteria have a positive and significant effect, which means they follow momentum in future.
The study is helpful for funds managers who are responsible for organizing practical plans on the
behalf of the financiers. The findings of this study are helpful to them in measuring the performance
of the stock market and it is also supportive in making buying and selling decisions.
We uncover a large and significant low-minus-high rank effect for commodities across two centuries. There is nothing anomalous about this anomaly, nor is it clear how it can be arbitraged away. Using nonparametric econometric methods, we demonstrate that such a rank effect is a necessary consequence of a stationary relative asset price distribution. We confirm this prediction using daily commodity futures prices and show that a portfolio consisting of lower-ranked, lower-priced commodities yields 23% higher annual returns than a portfolio consisting of higher-ranked, higher-priced commodities. These excess returns have a Sharpe ratio nearly twice as high as the U.S. stock market yet are uncorrelated with market risk. In contrast to the extensive literature on asset pricing factors and anomalies, our results are structural and rely on minimal and realistic assumptions for the long-run behavior of relative asset prices.
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Forecasting the winning matches of professional tennis players has a wide range of practical applications. We introduced an innovative approach to quantify and combine strategic and psychological momentum using the entropy weight method and analytic hierarchy process, and tested its effectiveness. Utilizing data from the Wimbledon Championship 2023, we constructed a support vector machine model to predict the turning point and winner of each point, and optimized it using particle swarm optimization. Our model achieved a significant level of accuracy (96.09% for turning point and 83.52% for predicting the winner) and performed well in different courts and players. Furthermore, we compared its performance with commonly utilized predictive models, including ARIMA, LSTM and BP networks, and found that our model exhibited higher accuracy than other existing models in predicting the point winner. Our study provides a reference for the role of momentum in dynamic matches, and our model can be used to calculate the odds of tennis matches and provide guidance to coaches.
This paper presents a method for accurately predicting the full distribution of stock returns, given a comprehensive set of 194 stock characteristics and market variables. Such distributions, learned from rich data using a machine learning algorithm, are not constrained by restrictive model assumptions and allow the exploration of non-Gaussian, heavy-tailed data and their non-linear interactions. The method uses a two-stage quantile neural network combined with spline interpolation. The results show that the proposed approach outperforms alternative models in terms of out-of-sample losses. Furthermore, we show that the moments derived from such distributions can be useful as alternative empirical estimates in many cases, including mean estimation and forecasting. Finally, we examine the relationship between cross-sectional returns and several distributional characteristics. The results are robust to a wide range of US and international data.
Rad istražuje momentum i contrarian strategije na hrvatskom dioničkom tržištu u razdoblju od 2000. do 2022. te nekoliko podrazdoblja unutar tog perioda. U cjelokupnom analiziranom razdoblju rezultati potvrđuju contarian efekt u kratkom, srednjem i dugom ulagačkom roku, dok su momentum i contrarian efekti potvrđeni u kratkom i srednjem ulagačkom roku u nekoliko podrazdoblja, pri čemu je contrarian efekt potvrđen u znatno većem broju slučajeva. Analiza ukazuje na varijabilnost veličine te značajnost momentum i contrarian efekta ovisno o periodu formiranja i periodu držanja portfelja te tržišnom režimu. Contrarian efekt potvrđen je u većem broju slučajeva i karakterizira ga općenito viša profitabilnost. Rezultati istraživanja u skladu su s nalazima literature koja je analizirala ove fenomene na razvijenim tržištima i tržištima u razvoju te upućuju na zaključak da hrvatsko tržište ima određenu vrstu memorije koja može biti podloga za generiranje dugoročnih ulagačkih profita.
Using the popular music of the day to measure people’s sentiment, this sentiment is endogenous rather than market sentiment. Through the analysis of endogenous sentiment and the trend of the price and trading volume of the Dow Jones Index, this paper finds that there is a correlation between the endogenous sentiment of the U.S. public and the trading volume of the U.S. stock market, and proposes one path of the influence of endogenous sentiment on stock market activity using VAR models, impulse response analysis models and Granger causality test models, etc. These findings support some theories in behavioral finance.
This study employs data from the Taiwan stock market to demonstrate the potential for capitalizing upon the momentum eect by exploiting the Almost Stochastic Dominance rules. Relative to classic momentum, our novel strategy achieves better risk-adjusted performance, and exhibits lower volatility and reduced negative skewness in returns. The abnormal returns are statistically and economically signicant when testing against alternative common risk factors. Most interestingly, the strategy's ability to generate excess returns is particularly pronounced when using shorter-term ranking and holding periods. Notable improvements in computational eciency suggest that practical implementability of the strategy shall prevail in cases where a large span of assets is considered.
Evaluating subsequent performance is critical in investment decision-making since investors make investment decisions now, but the profits generated will only be known later. However, the research on the significance of subsequent performance as trading signs issued by technical trading regulations in different seasons (hereafter referred to as seasonal effects) is limited and understudied, despite the widespread exploration of January and weekly effects in relevant studies. This study aimed to address this research gap and examine the impact of seasonal effects on clean energy and energy markets, revealing several critical findings. First, contrarian (momentum) trading rules generated better succeeding performance for the energy (clean energy) index than the clean energy (energy) index. Second, momentum (contrarian) trading rules generated better succeeding performance for the clean energy (energy) index than the energy (clean energy) index. Third, momentum (contrarian) trading rules exhibited stronger seasonal effects in Season 1 (Season 2) than in other seasons. Fourth, the analysis of RSI trading signals in Season 1 showed that the better succeeding index performance for clean energy was shown over 15% average holding period returns, compared to the near-zero mean daily returns for both clean energy and energy index returns over the data period. This study also indicates that considerable seasonal effects exist in both clean energy and energy markets.
Momentum profits depend mainly on the short leg and therefore on barriers to short sales. Our research indicates that the decline in momentum profitability in the past 2 decades is driven partly by a contemporaneous growth in stock options trading. Stock options offer an alternative to short selling, augmenting the stock lending market, and thereby contributing to improved pricing efficiency. The resulting reduction in barriers to short sales contributes to lower returns to momentum trading from the short leg. Our results persist after matching stocks with and without options based on different firm-level characteristics.
This paper investigates the performance of option investments across different stocks by computing monthly returns on at‐the‐money straddles on individual equities. We find that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from six to 36 months. This phenomenon is robust to including out‐of‐the‐money options or delta‐hedging the returns. Unlike stock momentum, option return continuation is not followed by long‐run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits.
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We show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the “dumb money effect” in mutual funds, experienced a sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.
This article finds evidence of return cross‐predictability among trading partners in international financial markets. We show that the predictability of international customers dominates the predictability of domestic customers, and the predictability of international intra‐industry customers dominates the predictability of international inter‐industry customers. This return cross‐predictability decreases with two country characteristics: financial sophistication and size.
Factor investing is designed to select securities based on different market drivers among which, the first that have been identified from the academic literature are size, value, and momentum. Factor research has the objective of generating risk and return profiles that differ from traditional models, focusing on different market drivers compatible with investor expectations. This investment style can be considered somewhere between active management and passive management. Active because the research is that of active returns with respect to the market portfolio, passive because it is based on defined and transparent rules. In this chapter, we first focus on the origins of factors through the academic literature. Secondly, we move to the asset manager’s perspective describing the various facets of factor investing in asset management. Finally, we focus on indexes aimed to describe each factor.KeywordsFactor investingSmart betaFama and French three-factor modelFactor indexing
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.
This article studies momentum in stock returns, focusing on the role of industry, size, and book-to-market (B/M) factors.
Size and B/M portfolios exhibit momentum as strong as that in individual stocks and industries. The size and B/M portfolios
are well diversified, so momentum cannot be attributed to firm- or industry-specific returns. Further, industry, size, and
B/M portfolios are negatively autocorrelated and cross-serially correlated over intermediate horizons. The evidence suggests
that stocks covary “too strongly” with each other. I argue that excess covariance, not underreaction, explains momentum in
the portfolios.
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information. Copyright 1996 by American Finance Association.
This paper documents that strategies that buy stocks that have performed well in the past and sell stocks that hav e performed poorly in the past generate significant positive returns o ver three- to twelve-month holding periods. The authors find that the profitability of these strategies are not due to their systematic risk or to delay ed stock price reactions to common factors. However, part of the abnorm al returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented. Copyright 1993 by American Finance Association.
This paper presents new empirical evidence of predictability of individual stock returns. The negative first-order serial correlation in monthly stock returns is highly significant. Furthermore, significant positive serial correlation is found at longer lags, and the twelve-month serial correlation is particularly strong. Using the observed systematic behavior of stock return, one-step-ahead return forecasts are made and ten portfolios are formed from the forecasts. The difference between the abnormal returns on the extreme decile portfolios over the period 1934-87 is 2.49 percent per month. Copyright 1990 by American Finance Association.
A test for the ex ante efficiency of a given portfolio of assets is analyzed. The relevant statistic has a tractable small sample distribution. Its power function is derived and used to study the sensitivity of the test to the portfolio choice and to the number of assets used to determine the ex post mean-variance efficient frontier. Several intuitive interpretations of the test are provided, including a simple mean-standard deviation geometric explanation. A univariate test, equivalent to our multivariate-based method, is derived, and it suggests some useful diagnostic tools which may explain why the null hypothesis is rejected. Empirical examples suggest that the multivariate approach can lead to more appropriate conclusions than those based on traditional inference which relies on a set of dependent univariate statistics. Copyright 1989 by The Econometric Society.
This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book‐to‐market, and prior‐year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive‐growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.
ABSTRACT Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market {3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in {3 that is unrelated to size, the relation between market {3 and average return is flat, even when {3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972)
Book-to-market ratio (BE/ME), market equity (ME), and one- year past return (momentum) (MOM) help explain the cross- section of expected individual stock returns within the U.S. and within other countries. Examining equity markets as a whole, in contrast to individual stocks, we uncover strong parallels between the explanatory power of these variables for individual stocks and for countries. First, country versions of BE/ME, ME, and MOM help explain the cross-section of expected country returns. Second, the January seasonal in ME's explanatory power for stocks also appears for countries. Third, portfolios formed by sorting stocks and countries on these variables produce similar patterns in profitability before and after the portfolio formation date.
This article analyzes the degree to which return consistency in the past predicts future returns. I show that consistency is a strong predictive measure for future stock returns. In a portfolio context, positively consistent stocks exhibit positive future risk-adjusted returns, and negatively consistent stocks exhibit negative future risk-adjusted returns. The results are economically and statistically significant over multiple subperiods. Also, odd return behavior persists for nearly two years after portfolio formation. Stocks that have been consistently positive (negative) for longer time horizons have higher (lower) risk-adjusted returns during the followingmonththan those thathavebeenconsistent for shorter time periods. Finally, high consistency enhances momentum when the two factors are allowed to interact. Thus, there appears to be strong path dependence in the momentum effect, and consistency in stock returns appears to be an important component of return predictability.
Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
Better proxies for the information about future returns contained in firm characteristics such as size, book-to-market equity, cash flow-to-price, percent change in employees, and various past return measures are obtained by breaking these explanatory variables into two industry-related components. The components represent (1) the difference between firms' own characteristics and the average characteristics of their industries (within-industry variables), and (2) the average characteristics of firms' industries (across-industry variables). Each variable is reliably priced within-industry and measuring the variables within-industry produces more precise estimates than measuring the variables in their more common form. Contrary to Moskowitz and Grinblatt [1999], we find that within-industry momentum (i.e., the firm's past return less the industry average return) has predictive power for the firm's stock return beyond that captured by across-industry momentum. We also document a significant short-term (one-month) industry momentum effect which remains strongly significant when we restrict the sample to only the most liquid firms.
This study examines momentum and reversals in currencies and international equity market indices. We find momentum in country equity market indices during the first year after the portfolio formation date and reversals during the subsequent two years. We also find momentum in currencies up to three years after the portfolio formation date but no reversals. Positive currency momentum predicts low stock index returns in the future weakening momentum and strengthening reversals in U.S. dollar-denominated stock index returns. Additional tests show that countries with positive (negative) equity momentum experience declining (increasing) nominal federal fund rates in the first year after portfolio formation date and increasing (decreasing) interest rates in the subsequent two years. We discuss the implications of our findings for rational and behavioral theories.
The value premium in U.S. stock returns is robust. The positive relation between average return and book-to-market equity is as strong for 1929 to 1963 as for the subsequent period studied in previous papers. A three-factor risk model explains the value premium better than the hypothesis that the book-to-market characteristic is compensated irrespective of risk loadings.
Investors may be able to benefit from equity style management. We find that three company characteristics—market value of equity, book-to-market ratio, and dividend yield-capture style-related trends in equity returns. We study all firms in the Standard and Poor's-500 index since 1976. Strategies that buy stocks with characteristics that are currently in favor (past winners) and that sell stocks with characteristics that are out-of-favor (past losers) perform well for periods up to 1 year and possibly longer. Style momentum in equity returns is an empirical phenomenon that is distinct from price and industry momentum.
The tendency of some investors to hold on to their losing stocks, driven by prospect theory and mental accounting, creates a spread between a stock's fundamental value and its equilibrium price, as well as price underreaction to information. Spread convergence, arising from the random evolution of fundamental values and the updating of reference prices, generates predictable equilibrium prices interpretable as possessing momentum. Empirically, a variable proxying for aggregate unrealized capital gains appears to be the key variable that generates the profitability of a momentum strategy. Controlling for this variable, past returns have no predictability for the cross-section of returns.
This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
This paper identifies observable firm-specific attributes that drive momentum. We find that a firm's revenues, costs, and growth options combine to determine the dynamics of its return autocorrelation. We use these insights to implement momentum strategies (buying winners and selling losers) with both numerically simulated returns and CRSP/Compustat data. In both sets of data, momentum strategies that use firms with high revenue growth volatility, low costs, or valuable growth options outperform traditional momentum strategies by approximately 5% per year.
Our paper re-examines the profitability of relative strength or momentum trading strategies (buying past strong performers and selling past weak performers). We find that standard relative strength strategies require frequent trading in disproportionately high cost securities such that trading costs prevent profitable strategy execution. In the cross-section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists.
This paper presents a new pattern in the cross-section of expected stock returns. Stocks tend to have relatively high (or low) returns every year in the same calendar month. We recognize the annual cross-sectional autocorrelation pattern documented in Jegadeesh [1990. Evidence of predictable behavior of security returns. Journal of Finance 45, 881–898] at lags of 12, 24, and 36 months as part of a general pattern that lasts up to 20 annual lags, superimposed on the general momentum/reversal patterns. This pattern explains an economically and statistically significant magnitude of the cross-sectional variation in average stock returns. Volume and volatility exhibit similar seasonal patterns but they do not explain the seasonality in returns. The pattern is independent of size, industry, earnings announcements, dividends, and fiscal year. The results are consistent with the existence of a persistent seasonal effect in stock returns.
The consistency of positive past returns and tax-loss selling significantly affects the relation between past returns and the cross-section of expected returns. Analysis of these additional effects across stock characteristics, seasons, and tax regimes provides clues about the sources of temporal relations in stock returns, pointing to potential explanations for this relation. A parsimonious trading rule generates surprisingly large economic returns despite controls for confounding sources of return premia, microstructure effects, and data snooping biases.
This study examines momentum and reversals in international stock market indices. We find that country stock indices exhibit momentum during the first year after the portfolio formation date and reversals during the subsequent 2 years. Positive currency momentum predicts low stock index returns in the future, thereby weakening momentum and strengthening reversals in U.S. dollar-denominated stock index returns. Cross-sectional regression tests involving individual stock indices confirm the portfolio findings. Our results are consistent with a key prediction of recent behavioral theories, that initial momentum should be accompanied by subsequent reversals.
The value premium in U.S. stocks returns is robust. The positive relation between average return and book-to-market equity (BE/ME) is as strong for 1929-63 as for the subsequent period studied in previous papers. Like others, we also find a size premium in stock returns. Small stocks have higher average returns than big stocks. The size premium is, however, weaker and less reliable than the value premium. The relations between average return and firm characteristics (size and BE/ME) are better explained by a three-factor risk model than by the behavioral hypothesis that investor overreaction causes characteristics to be compensated irrespective of risk loadings.
I argue that the slow diffusion of industry information is a leading cause of the lead-lag effect in stock returns. I find that the lead-lag effect between big firms and small firms is predominantly an intra-industry phenomenon. Moreover, this effect is driven by sluggish adjustment to negative information, and is robust to alternative determinants of the lead-lag effect. Small, less competitive and neglected industries experience a more pronounced lead-lag effect. The lead-lag effect is related to the post-announcement drift of small firms following the earnings releases of big firms within the industry. , Oxford University Press.
We identify a “slope” factor in exchange rates. High interest rate currencies load more on this slope factor than low interest
rate currencies. This factor accounts for most of the cross-sectional variation in average excess returns between high and
low interest rate currencies. A standard, no-arbitrage model of interest rates with two factors—a country-specific factor
and a global factor—can replicate these findings, provided there is sufficient heterogeneity in exposure to global or common
innovations. We show that our slope factor identifies these common shocks, and we provide empirical evidence that it is related
to changes in global equity market volatility. By investing in high interest rate currencies and borrowing in low interest
rate currencies, U.S. investors load up on global risk.
Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories. The
convenience yield is a decreasing, nonlinear function of inventories. Price measures, such as the futures basis, prior futures
returns, prior spot returns, and spot price volatilities reflect the state of inventories and are informative about commodity
futures risk premiums. We verify these theoretical predictions using a comprehensive data set on 31 commodity futures and
physical inventories between 1971 and 2010. We find no evidence that the positions of participants in futures markets predict
risk premiums on commodity futures.
It is well established that recent prior winner and loser stocks exhibit return continuation; a momentum strategy of buying recent winners and shorting recent losers appears profitable in the post 1945 era. In contrast, the risk exposure of such a strategy has not been well understood; the strategy's unconditional average risk exposure can be deceptive. The stock selection method of a momentum strategy guarantees that large and time varying factor exposured will be borne in accordance with the performance of the common risk factors during the periods in which stocks were ranked to determine their winner/losed status.
Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
This paper tests whether the "disposition effect," that is the tendency of investors to ride losses and realize gains, induces "underreaction" to news, leading to return predictability. I use data on mutual fund holdings to construct a new measure of reference purchasing prices for individual stocks, and I show that post-announcement price drift is most severe whenever capital gains and the news event have the same sign. The magnitude of the drift depends on the capital gains (losses) experienced by the stock holders on the event date. An event-driven strategy based on this effect yields monthly alphas of over 200 basis points. Copyright 2006 by The American Finance Association.
This paper documents a strong and prevalent momentum effect in industry components of stock returns which accounts for much of the individual stock momentum anomaly. Specifically, momentum investment strategies, which buy past winning stocks and sell past losing stocks, are significantly less profitable once we control for industry momentum. By contrast, industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable, even after controlling for size, book-to-market equity, individual stock momentum, the cross-sectional dispersion in mean returns, and potential microstructure influences. Copyright The American Finance Association 1999.
We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non-proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break-even fund sizes that lead to zero abnormal returns. In addition to equal- and value-weighted momentum strategies, we derive a liquidity-weighted strategy designed to reduce the cost of trades. Equal-weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity-weighted and hybrid liquidity/value-weighted strategies have the largest break-even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish. Copyright 2004 by The American Finance Association.
Momentum effects in stock returns need not imply investor irrationality, heterogeneous information, or market frictions. A simple, single-firm model with a standard pricing kernel can produce such effects when expected dividend growth rates vary over time. An enhanced model, under which persistent growth rate shocks occur episodically, can match many of the features documented by the empirical research. The same basic mechanism could potentially account for underreaction anomalies in general. Copyright The American Finance Association 2002.
Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market "beta", size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in "beta" that is unrelated to size, t he relation between market "beta" and average return is flat, even when "beta" is the only explanatory variable. Copyright 1992 by American Finance Association.
We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ("momentum"), short-run earnings "drift," but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. Copyright The American Finance Association 1998.
: We model a market populated by two groups of boundedly rational agents: "newswatchers" and "momentum traders". Each newswatcher observes some private information, but fails to extract other newswatchers' information from prices. If information diffuses gradually across the population, prices underreact in the short run. The underreaction means that the momentum traders can profit by trend-chasing. However, if they can only implement simple (i.e., univariate) strategies, their attempts at arbitrage must inevitably lead to overreaction at long horizons. In addition to providing a unified account of under- and overreactions, the model generates several other distinctive implications. * Stanford Business School and MIT Sloan School of Management and NBER. This research is supported by the National Science Foundation and the Finance Research Center at MIT. We are grateful to Denis Gromb, Ren Stulz, an anonymous referee, and seminar participants at MIT, Michigan, Wharton, Duke, UCLA, Berk...
: Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion modelofHong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public. * Hong is from the Stanford Business School, Lim is from the AmosTuck School, Dartmouth College, and Stein is from the MIT Sloan School of Management and the National Bureau of Economic Research. This research is supported by the National Science Foundation and the Finance Research Center at MIT. We are grateful to J...
Previous studies identify predetermined variables that predict stock and bond returns through time. This paper shows that loadings on the same variables provide significant cross-sectional explanatory power for stock portfolio returns. The loadings are significant given the three factors advocated by Fama and French (1993) and the four factors of Elton, Gruber and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The results carry implications for risk analysis, performance measurement, cost-of-capital calculations and other applications. EMPIRICAL ASSET PRICING is in a state of turmoil. The Capital Asset Pricing Model (CAPM, Sharpe (1964), Black (1972)) has long served as the backbone of academic finance and numerous important applications. However, studies have identified empirical deficiencies in the CAPM, challenging its preeminence. The most powerful challenges include market capit...
Returns to Buying Winners and Selling Losers
- Jegadeesh
- Sheridan Narasimhan
- Titman
Jegadeesh, Narasimhan, and Sheridan Titman, 1993, “Returns to Buying Winners and Selling Losers,” Journal of Finance, Vol. 48, pp. 65-91.
- Cliff S Asness
- J Tobias
- Lasse Heje Moskowitz
- Pedersen
Asness, Cliff S., Tobias J. Moskowitz, and Lasse Heje Pedersen, 2008, " Value and Momentum
Everywhere, " working paper.