Default probability anomalies in the momentum strategies

Nicholas Rueilin Lee, Jung-Fang Liu and Wei-Yu Lin

Applied Economics Letters, 2014, vol. 21, issue 17, 1206-1209

Abstract: This study examines the usefulness of default probability ( DP ) in explaining momentum profits. We follow Merton (1974) in computing the DP and then follow Jegadeesh and Titman (1993) in conducting default momentum investing. We consider emerging Taiwanese stock market and divide its stocks into three DP groups. Our findings show that adding DP to momentum investing leads to an increase in momentum profits, suggesting that momentum pay-off increases as DP increases. Moreover, a significant and positive momentum profit of buying winners in the high- DP group and selling losers in the low- DP group is observed, implying that DP anomalies exit in momentum strategies. These findings shed light on the source of profitability of momentum strategies.

Date: 2014
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DOI: 10.1080/13504851.2014.920463

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