Is momentum a self-fulfilling prophecy?

The author shows in a simple framework that momentum trading can exist in equilibrium and that momentum trading is profitable. A property of the model is that the relation between risk, reward, and the intensity of momentum trading provides a natural limit to the amount of momentum trading that will exist in equilibrium. Properties of the model fit the empirics well. First, the model captures in a parsimonious manner both short-term overreaction and long-term reversals. Second, it predicts that momentum and long-term reversals should be observed in any market where there is noise. Thus, the model gives theoretical support to the empirical evidence that these anomalies are not artifacts of data snooping and to the extant empirical evidence that these anomalies are pervasive. Momentum traders observe noise shocks and trade on it as information. This trading incorporates a predictive role to the noise. That is, if agents believe a past price change to be informative of future price changes and act on this belief, it will be true and trading on this belief will be profitable. Thus, momentum trading is a self-fulfilling action.     

Can small investors exploit the momentum effect?

This study uses UK data and investigates whether small investors can exploit the continuation effect in share prices. Individual traders are not in a financial position to buy and sell short hundreds of firms, as suggested by existing academic research, and thus this study uses extreme performance companies to implement the strategy. We find that strong momentum gains appear when extreme winners and losers are employed. These returns remain strong even after considering the transaction costs of implementing such strategies, including commissions, stamp duty, selling-short costs, and bid-ask spread. Overall, we show that a relatively large number of small investors can enjoy momentum gains, providing some evidence against stock market efficiency.     

Reexamining momentum profits: Underreaction or overreaction to firm-specific information?

We design a new measure and find that the predictability of past returns on future returns increases as stocks respond with delay to firm-specific information. Our results suggest that momentum is caused by both investors’ underreaction and overreaction to information. However, underreaction to information seems to be the primary cause, particularly during the more recent period. Our findings are robust for recent explanations of momentum profits and alternative methods for computing our measure. We also find that stocks respond with delay to firm-specific information, partly due to certain firm characteristics, and partly because they escape investor attention due to their low visibility. Our paper extends and refines Jegadeesh and Titman’s (J Financ 56(2):699–720, 2001) finding that momentum profits are consistent with behavioral models’ predictions regarding investors’ overreaction.     

Can exchange traded funds be used to exploit industry and country momentum?

There is overwhelming empirical evidence on the existence of country and industry momentum effects. This line of research suggests that investors who buy country and industry portfolios with relatively high past returns and sell countries and industries with relatively low past returns will earn positive risk-adjusted returns. These studies focus on country and industry indexes that cannot be traded directly by investors. This raises the question of whether country and industry momentum effects really can be exploited by investors or whether they are illusionary in nature because they exist only on non-tradable assets. We analyze the profitability of country and industry momentum strategies using actual price data on exchange traded funds (ETFs). We find that over the sample periods during which these ETFs were traded, an investor would have been able to exploit country and industry momentum strategies with an excess return of about 5 % per annum. These returns cannot be explained by unconditional exposures to the Fama–French factors. The daily average bid-ask spreads on ETFs are substantially below the implied break-even transaction cost levels. Hence, we conclude that investors who are not willing or able to trade individual stocks may use ETFs to benefit from momentum effects in country and industry portfolios.     

Predicting premiums for the market, size, value, and momentum factors

This paper investigates the out-of-sample predictability of monthly market as well as size, value, and momentum premiums. We use a sample from each of the US and the Swiss stock markets between 1989 and 2007. Using the Swiss sample provides an important new perspective as the repeated evaluation of the same (US) data set leads to data mining problems. To avoid data mining in our predictability study, we test both statistical significance and robustness in the two samples. Our key results are as follows. We find no robust indication that the market premium is predictable, which is also true for the momentum and value premiums. It cannot be excluded that the results from the US may be caused by data mining in light of the results from the Swiss sample. However, the size premium seems to be somewhat predictable, due to the credit spread. We theorize that there are three possible reasons for this rare evidence for predictability. First, predictability may have disappeared over the last decade, as academic research made the respective information public. Second, predictability seems, as we demonstrate, not to be robust to the choice of methodology. Third, robustness tests in the Swiss sample reveal that many of the supposedly statistically significant interrelations from the US sample may be attributed to randomness, which, in that case, would be data mining. Therefore, we think that future discussions of predictability should address the issue of data mining by applying robustness tests.

Is momentum trading profitable from Shari'ah compliant stocks?

This research offers fresh evidence supporting the pervasiveness of the momentum effect. Two decades after the momentum profitability firstly documented by Jegadeesh and Titman (1993), yet little research has been specifically devised for the momentum profitability on Shari'ah compliant stocks. We assess the momentum profitability over the Shari'ah compliant stocks in a Malaysian setting. We find evidence of strong return persistence as far as toward four-year holding period. Interestingly, no significant momentum returns are found among the conventional stocks. Upon further exploration we find neither an industry-driven momentum effect nor the small size firms can account for the momentum returns. Using return persistency formation criteria, we further find that underreaction seems to well fit in explaining this unique long lasting momentum profitability.