Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics

Pavel Bandarchuk and Jens Hilscher
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Pavel Bandarchuk: State Street Global Advisors

No 38, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.

Keywords: Momentum; Past Returns; Volatility; Stock-level Characteristics; Double Sorts (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP38.pdf First version, 2011 (application/pdf)

Related works:
Journal Article: Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:38

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