Momentum Investing

Jiang, G., Li, D., & Li, G. (2012). Capital investment and momentum strategies. Review of Quantitative Finance & Accounting, 39(2), 165–188.

"The main purpose of this paper is to investigate whether capital investment can affect stock price momentum. We provide empirical evidence that momentum strategies tend to be more profitable for stocks with large capital investment or investment changes. We present a simple explanation for our empirical results and show that our finding is consistent with the behavioral finance theory that characterizes investors' increased psychological bias and the more limited arbitrage opportunity when the estimation of firm value becomes more difficult or less accurate."

Asness, Cliff S. and Moskowitz, Tobias J. and Pedersen, Lasse Heje, Value and Momentum Everywhere (June 1, 2012). Chicago Booth Research Paper No. 12-53; Fama-Miller Working Paper.

"We study the returns to value and momentum strategies jointly across eight diverse markets and asset classes. Finding consistent value and momentum premia in every asset class, we further find strong common factor structure among their returns. Value and momentum are more positively correlated across asset classes than passive exposures to the asset classes themselves. However, value and momentum are negatively correlated both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum simultaneously across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities."

Sapp, T. (2011). The 52-week high, momentum, and predicting mutual fund returns. Review of Quantitative Finance & Accounting, 37(2), 149–179.

"George and Hwang (J Finance 59:2145-2176, ) have shown that the 52-week high share price carries significant predictive ability for individual stock returns, dominating other common momentum-based trading strategies. Based upon their results and other methods, this paper examines and compares the performance of three momentum trading strategies for mutual funds, including an analogous 1-year high measure for the net asset value of mutual fund shares. Strategies based on prior extreme returns and on fund exposure to stock return momentum are also examined. Results show that all three measures have significant, independent, predictive ability for fund returns. Further, each produces a distinctive pattern in momentum profits, whether measured in raw or risk-adjusted returns, with profits from momentum loading being the least transitory. Nearness to the 1-year high and recent extreme returns are significant predictors of fund monthly cash flows, whereas fund momentum loading is not."

Aarts, F., & Lehnert, T. (2005). On style momentum strategies. Applied Economics Letters, 12(13), 795–799.

"Barberis and Shleifer (2003) suggest that US investors classify assets into different styles based on, for example, market capitalization or B/M ratios. They find that prices can deviate substantially from fundamental values as a style's popularity changes over time. In this paper, we discuss implications of this prediction and empirically investigate the profitability of style momentum strategies for the UK stock market. Results suggest that a simple trading rule can generate significant positive returns, but for our sample of FTSE 350 stocks those strategies are less profitable and more risky compared to regular momentum strategies."

van Dijk, R., & Huibers, F. (2002). European Price Momentum and Analyst Behavior. Financial Analysts Journal, 58(2), 96.

"Previous studies have found evidence that selecting stocks with positive price momentum is effective in the U.S., European, and emerging stock markets periods up to a year. The reasons that historical price momentum forecasts the direction and magnitude of stock returns, however, are not clear. Insight into the determinants of price momentum would allow investors to judge whether and how price momentum should play a role in their investment strategies. Studying the European stock markets, we found that positive price momentum is caused by analyst underreaction to new earnings information. We found earnings surprises, expected earnings growth, and earnings revisions to be systematically related to historical price movements. Importantly, the data show that European price momentum is distinct from the widely documented value and size effects. Our findings clarify the benefits of assessing analyst behavior to predict whether momentum investing might work in the next period."

Lobão, J., & Azeredo, M. (2018). Momentum meets value investing in a small European market. Portuguese Economic Journal, 17(1), 45–58.

"In this paper, we investigate two prominent market anomalies documented in the finance literature – the momentum effect and value-growth effect. We conduct an out-of-sample test to the link between these two anomalies recurring to a sample of Portuguese stocks during the period 1988–2015. We find that the momentum of value and growth stocks is significantly different: growth stocks exhibit a much larger momentum than value stocks. A combined value and momentum strategy can generate statistically significant excess annual returns of 10.8%. These findings persist across several holding periods up to a year. Moreover, we show that macroeconomic variables fail to explain value and momentum of individual and combined returns. Collectively, our results contradict market efficiency at the weak form and pose a challenge to existing asset pricing theories."

Sarwar, G., Mateus, C., & Todorovic, N. (2017). A tale of two states: asymmetries in the UK small, value and momentum premiums. Applied Economics, 49(5), 456–476.

"This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs."

Al-Mwalla, M. (2012). Can Book-to-Market, Size and Momentum be Extra Risk Factors that Explain the Stocks Rate Of Return?: Evidence from Emerging Market. Journal of Finance, Accounting & Management, 3(2), 42–57.

"The main objective of this study is to test the ability of different asset pricing models Fama & French three factor model and the augmented Fama & French Four Factor model, to explain the variation in stocks rate of return over the period from June 1999 to June 2010. The study also investigates the existence of the size and value Momentum effects in ASE. The study found a strong size and strong positive value effects in ASE. The study results indicate that the Fama & French three factor model provide better explanation to the variation in stocks rates of return for some portfolios and is better than the augmented Fama - French Four -Factor model."

Docherty, P., & Hurst, G. (2018). Investor Myopia and the Momentum Premium across International Equity Markets. Journal of Financial & Quantitative Analysis, 53(6), 2465–2490.

"Myopic investors focus on short-run price changes rather than long-term fundamental value, resulting in an overweighting of public information and a slow diffusion of fundamental news. Such processing of information can produce price drifts similar to those seen in behavioral models of momentum. We explore the impact of myopia over an international sample, finding that momentum is stronger in more myopic countries, and this relationship is magnified where the proportion of funds under delegated management is high. We therefore argue that investor myopia, which arises due to agency issues in delegated funds management, is an important determinant of momentum."

Blitz, David and van Vliet, Pim, Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes (2008). Journal of Portfolio Management, pp. 23-28, Fall 2008.

"In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return exceeding 9% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by implicit beta exposures or the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away."

Asness, Cliff S. and Frazzini, Andrea and Israel, Ronen and Moskowitz, Tobias J., Fact, Fiction and Momentum Investing (May 9, 2014). Journal of Portfolio Management, Fall 2014 (40th Anniversary Issue); Fama-Miller Working Paper.

"It’s been more than 20 years since the academic discovery of momentum investing, yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases “confusion and debate” is our attempting to be polite, because it is nearly impossible for informed practitioners and academics to still believe some of the myths uttered about momentum—but that impossibility is often belied by real-world statements. In this article, the authors aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. They highlight 10 myths about momentum and refute them, using results from widely circulated academic papers and analysis from simple publicly available data."

ROUWENHORST, K. G. (1998). International Momentum Strategies. Journal of Finance, 53(1), 267–284.

"International equity markets exhibit medium-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium-term Winners outperforms a portfolio of medium-term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in all twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies."

Kalok Chan, Hameed, A., & Tong, W. (2000). Profitability of Momentum Strategies in the International Equity Markets. Journal of Financial & Quantitative Analysis, 35(2), 153–172.

"This paper examines the profitability of momentum strategies implemented on international stock market indices. Our results indicate statistically significant evidence of momentum profits. The momentum profits arise mainly from time-series predictability in stock market indices--very little profit comes from predictability in the currency markets. We also find higher profits for momentum portfolios implemented on markets with higher volume in the previous period, indicating that return continuation is stronger following an increase in trading volume. This result confirms the informational role of volume and its applicability in technical analysis."

Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

"We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information."

Jegadeesh, N., & Titman, S. (2001). Profitability of Momentum Strategies: An Evaluation of Alternative Explanations. Journal of Finance, 56(2), 699–720.

"This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution."

Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65–91.

"This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented."

Pätäri, E., Leivo, T., & Honkapuro, S. (2012). Enhancement of equity portfolio performance using data envelopment analysis. European Journal of Operational Research, 220(3), 786–797.

"This paper examines the applicability of data envelopment analysis (DEA) as a basis of selection criteria for equity portfolios. It is the first DEA application for constructing a combined equity investment strategy that aims to integrate the benefits of both value investing and momentum investing. The 3-quantile portfolios are composed of a comprehensive sample of Finnish non-financial stocks based on their DEA efficiency scores that are calculated using three variants of DEA models (the constant returns-to-scale, the super-efficiency, and the cross-efficiency models). The performance of portfolios is evaluated on the basis of the average return and several risk-adjusted performance metrics throughout the 1994–2010 sample period. The results show the capability of the DEA approach to add value to equity portfolio selection. The outperformance of the top 3-quantile DEA portfolios in contrast to both the comparable bottom portfolio and the stock market average is statistically significant on the basis of all performance measures employed. The outperformance is slightly more significant when the stock price momentum is included in the DEA variables. The methodology employed offers an interesting alternative for detecting the outperforming stocks of the future by capturing both the price momentum and several dimensions of relative value simultaneously. DEA is particularly useful as a multicriteria methodology in cases in which the number of stocks in the sample is large. It therefore also has useful implications to practical portfolio management."