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Low-Cost Momentum Strategies

Xiafei Li, Chris Brooks and Jöelle Miffre
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Xiafei Li: Cass Buisness School, City University (UK)
Jöelle Miffre: EDHEC Business School, Nice, France

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement, should asset managers decide to adopt low-cost relative-strength strategies.

Keywords: Momentum profits; Transaction costs; Low-cost strategy (search for similar items in EconPapers)
JEL-codes: G12 G19 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2007-08
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