Has momentum lost its momentum?

Debarati Bhattacharya (), Wei-Hsien Li () and Gokhan Sonaer ()
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Debarati Bhattacharya: Duquesne University
Wei-Hsien Li: National Central University
Gokhan Sonaer: Duquesne University

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 1, No 7, 218 pages

Abstract: Abstract We evaluate the robustness of momentum returns in the US stock market over the period 1965–2012. We find that momentum profits have become insignificant since the late 1990s. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Momentum profits remain insignificant in tests designed to control for seasonality, up or down market conditions, firm size and liquidity. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (Handbook of the economics of finance. Elsevier, Amsterdam, 2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest two other possible explanations for the declining momentum profits, besides uncovering of the anomaly by investors, that involve decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.

Keywords: Momentum; Market efficiency; Market anomaly; Asset pricing (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (19)

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DOI: 10.1007/s11156-015-0547-8

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