The impact of liquidity and transaction costs on the 52-week high momentum strategy in Australia

Jenni L. Bettman, Stephen J. Sault and Anna H. von Reibnitz
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Jenni L. Bettman: School of Finance, Actuarial Studies and Applied Statistics, Research School of Business, Australian National University, Canberra, Australia, jenni.bettman@anu.edu.au
Stephen J. Sault: School of Finance, Actuarial Studies and Applied Statistics, Research School of Business, Australian National University, Canberra, Australia
Anna H. von Reibnitz: School of Finance, Actuarial Studies and Applied Statistics, Research School of Business, Australian National University, Canberra, Australia

Australian Journal of Management, 2010, vol. 35, issue 3, 227-244

Abstract: In this paper we investigate the profitability of the 52-week high momentum strategy in the Australian equity market over the period 1996—2008. We provide the first examination of the economic significance of the strategy by applying short-sale restrictions and utilizing bid-and-ask prices and trading volume to proxy for transaction costs and liquidity constraints, respectively. Testing reveals that the strategy yields significantly positive raw returns when concentrated purely on the more liquid stocks in the market, with significantly negative returns evident among illiquid stocks. This suggests that the anchor-and-adjust bias on which the strategy is based only exists among stocks with sufficient liquidity. Furthermore, the 52-week high strategy comprising liquid stocks fails to produce significant dollar profits once short-sale restrictions, transaction costs and liquidity constraints are accounted for. We therefore conclude that the 52-week high momentum trading strategy is not of practical use to investors in Australia.

Keywords: 52-week high; economic significance; momentum (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:35:y:2010:i:3:p:227-244

DOI: 10.1177/0312896210385282

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