The 52-week high momentum strategy in international stock markets

We study the 52-week high momentum strategy in international stock markets proposed by George and Hwang [George, T., Hwang, C.Y., 2004. The 52-week high and momentum investing. Journal of Finance 59, 2145-2176.]. This strategy produces profits in 18 of the 20 markets studied, and the profits are significant in 10 markets. The 52-week high momentum profits exist independently from the Jegadeesh and Titman [Jegadeesh, N., Titman, S., 1993. Returns to buying winners and selling losers: implications for market efficiency. Journal of Finance 48, 65-91.] individual stock and Moskowitz and Grinblatt [Moskowitz, T.J., Grinblatt, M., 1999. Do industries explain momentum? Journal of Finance 54, 1249-1290] industry momentum strategies. These profits do not show reversals in the long run. We find that the 52-week high is a better predictor of future returns than macroeconomic risk factors or the acquisition price. The individualism index, a proxy to the level of overconfidence, has no explanatory power to the variations of the 52-week high momentum profits across different markets. However, the profits are no longer significant in most markets once transaction costs are taken into account.     

ADRs under momentum and contrarian strategies

Given the recent growth in the American Depositary Receipts (ADRs) and the current general climate of globalization in world equity exchanges, this paper investigates the ADRs as a distinct group of stocks within the framework of momentum and contrarian strategies. It considers the entire body of the level III ADRs from January 1982 to December 2005 and provides an analysis of their performance under various momentum and contrarian strategies. The methodology that is employed draws upon and is an extension of Lo and Mackinlay [Lo, Andrew W. and A. Craig MacKinlay, 1990. When are contrarian profits due to stock market overreaction? Review of Financial Studies, v3 (2), 175–206.] and Jegadeesh and Titman [Jegadeesh, Narasimhan and Sheridan Titman, 2001. Profitability of momentum strategies: An evaluation of alternative explanations, Journal of Finance, v56 (2, Apr), 699–720.]. The results indicate considerable support for the presence of the momentum and contrarian strategies in the ADRs market. The profitability of such strategies obviously runs counter to the efficient market hypothesis. These issues are elaborated upon and suggestions for further research are offered.     

Informed momentum trading versus uninformed “naive” investors strategies

We construct a zero net-worth uninformed “naive investor” who uses a random portfolio allocation strategy. We then compare the returns of the momentum strategist to the return distribution of naive investors. For this purpose we reward momentum profits relative to the return percentiles of the naive investors with scores that are symmetric around the median. The score function thus constructed is invariant and robust to risk factor models. We find that the average scores of the momentum strategies are close to zero (the score of the median) and statistically insignificant over the sample period between 1926 and 2005, various sub-sample periods including the periods examined in [Jegadeesh and Titman, 1993] and [Jegadeesh and Titman, 2001] . The findings are robust with respect to sampling or period-specific effects, tightened score intervals, and the imposition of maximum-weight restrictions on the naive strategies to mitigate market friction considerations.     

Industry momentum strategies and autocorrelations in stock returns

In this study, we examine the sources of profits to momentum strategies of buying past winner industry portfolios and selling short past loser industry portfolios. We decompose the profit into (1) own-autocovariances in industry portfolio returns, (2) cross-autocovariances among industry portfolio returns, and (3) cross-sectional dispersion in mean portfolio returns. Our empirical results show that the industry momentum effect is mainly driven by the own-autocorrelation in industry portfolio returns, not by return cross-autocorrelations or by cross-sectional differences in mean returns. Indeed, the industry momentum strategy generates statistically significant profits only when own-autocorrelations are positive and statistically significant. The evidence is consistent with several behavioral models (e.g. Journal of Financial Economics 45 (1998) 307; Journal of Finance 53 (1998) 1839; Journal of Finance 54 (1999) 2143) that suggest positive own-autocorrelations in stock returns and hence the price momentum.     

Are intraday reversal and momentum trading strategies feasible? An analysis for German blue chip stocks

The success of trading strategies that lead to abnormal excess returns based on annual/monthly investment periods has recently declined significantly. We adopt the original frameworks of De Bondt and Thaler (J Finance 40(3):793–808, 1985) and Jegadeesh and Titman (J Finance 48(1):65–91, 1993) to an intraday reversal as well as momentum strategy scheme based on 5-min stock returns. We analyze 16 reversal and momentum strategies each with ranking and holding periods of 60, 120, 180 or 300 min (reversal strategies) and 15, 30, 45 or 60 min (momentum strategies) from a retail investor’s perspective. We find no indications for momentum in stock prices but strong indications for reversals. Our results are furtherly robust regarding to market adjustment, portfolio sizes and skipping periods between ranking and holding periods. Our results show that the returns of the reversal strategies are statistically significant, however, yet too small to be economically significant. Our results also confirm the efficiency on the stock markets.

     

Momentum strategies: some bootstrap tests

This study introduces a new estimation-based bootstrap simulation procedure to test whether different returns-generating models can explain the profitability of momentum strategies first documented by Jegadeesh and Titman [J. Finance 48 (1993)]. We incorporate simple random walk and multifactor models and allow for autocorrelation, cross-correlation, conditional heteroskedasticity and predictability through conditioning information variables. We also evaluate alternative sampling procedures for the bootstrap simulations. None of the models, however, are able to generate simulated profits as large as the actual profits. We do find, however, that accounting for time-varying expected returns with market-wide and macroeconomic instrumental variables can explain 75–80% of the profits.     

Conditional performance, portfolio rebalancing, and momentum of small-cap mutual funds

To assess the performance of small-cap stocks net of transaction costs, we analyze 165 actively managed small-cap oriented portfolios. Our analysis addresses three areas of interest: (i) performance net of transaction costs, (ii) the magnitude of trading costs incurred when rebalancing an actively managed portfolio, and (iii) the potential for momentum strategy profits when investing in small-cap stocks.Using conditional estimation, we find that small-cap funds have earned a significantly positive abnormal return of about 2% per year in the period January 1986 to December 2000. We also estimate the cost of January rebalancing to be 0.4% of portfolio value, a value that is significant for over 20% of the portfolios under study.Finally, after trading frictions are taken into account, we find evidence that small-cap portfolios exhibit significant return patterns, similar in nature to momentum patterns initially documented in a frictionless setting by [J. Finance 48 (1993) 65; J. Finance 56 (2001) 699]. Our findings support recent behavioral models, which attempt to explain these patterns. Consistent with the findings of Jegadeesh and Titman, we find that past “winners” continue to outperform in the next 12 months, followed by a performance reversal.     

Price Momentum and Idiosyncratic Volatility

We find that returns to momentum investing are higher among high idiosyncratic volatility ( IVol) stocks, especially high IVol losers. Higher IVol stocks also experience quicker and larger reversals. The findings are consistent with momentum profits being attributable to underreaction to firm‐specific information and with IVol limiting arbitrage of the momentum effect. We also find a positive time‐series relation between momentum returns and aggregate IVol. Given the long‐term rise in IVol, this result helps explain the persistence of momentum profits since Jegadeesh and Titman's (1993) study.     

Dividends and price momentum

Stock market evidence shows that momentum profits are lower among dividend-paying firms than their non-paying counterparts due to differences in losers’ returns. Additionally, dividend maintenance is associated with higher returns for losers but not for winners. Finally, buying winners that increased their dividends and shorting losers that decreased their dividends enhances momentum profits. Consistent with the evidence, the behavioral models suggest that investors underreact to the losers’ positive dividend-maintaining news, reducing their return momentum and shrinking the payers’ momentum profit. Also, underreaction to positive news from winners’ dividend-increasing announcements as well as to negative news from losers’ dividend-decreasing announcements explains the higher momentum profits for strategies based on these stocks. The results do not appear consistent with risk-based explanations.     

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

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.     

Momentum strategies of German mutual funds

The existence of the momentum effect in stock returns has been documented for the US (e.g., Jegadeesh and Titman in J. Finance 48(1), 65–91, 1993) and many other national equity markets worldwide (e.g., Griffin et al. in J. Finance 58(6), 2515–2547, 2003). However, little is known about the active employment of momentum strategies among institutional investors outside the US. This paper provides first evidence of momentum behavior among German mutual funds. We find the fund trades to follow stock returns on an aggregated institutional level. Moreover, we detect significant momentum behavior among funds with a European and global equity focus, as well as among funds predominantly investing in Asia. In contrast, German funds do not seem to engage in momentum strategies when trading domestic stocks. While only half the funds in our sample trade in accordance with past returns, 66 % of the funds within the largest size quintile follow momentum strategies. Finally, we do not find momentum trading funds to outperform the other funds.     

Behavioral explanations of trading volume and short-horizon price patterns: An investigation of seven Asia-Pacific markets

We investigate whether behavioral postulations offer any implicit explanation of the country-varying relation between trading volume and price pattern among short-horizon winners/losers in seven Pacific-Basin markets during the period 1990 to 2000. Our findings lend credence to the Lee and Swaminathan [Lee, C. and Swaminathan, B., 2000. Price momentum and trading volume, Journal of Finance 55, 2017–2069.] Momentum Life Cycle explanation that high (low) volume winners (losers) are more likely to experience price reversals, whereas high (low) volume losers (winners), price momentum, in the subsequent period. This observation is especially pronounced in Hong Kong. Other models such as those based on an information diffusion process and overconfidence in glamour stocks offer limited explanation for the relation.     

Is default risk the hidden factor in momentum returns? Some empirical results

This paper analyzes the role of default risk in the momentum effect focusing on data from four developed European stock markets (France, Germany, Spain and the United Kingdom). Using a market‐based measure of default risk, we show that it is not the hidden factor behind this effect. While the loser portfolio is characterized by high default risk, small size, high book‐to‐market and illiquidity, characterization of the winner portfolio is somewhat more complex. Given that the momentum strategy is the return differential between the winners and the losers, factors such as the stock market cycle or the evolution of momentum portfolios against their reference point make momentum profits difficult to forecast.     

Contrarian Profits and the Overreaction Hypothesis: the Case of the Athens Stock Exchange

This paper investigates the existence of contrarian profits and their sources for the Athens Stock Exchange (ASE). The empirical analysis decomposes contrarian profits to sources due to common factor reactions, overreaction to firm‐specific information, and profits not related to the previous two terms, as suggested by Jegadeesh and Titman (1995). Furthermore, in view of recent evidence that common stock returns are related to firm characteristics such as size and book‐to‐market equity, the paper decomposes contrarian profits to sources due to factors derived from the Fama and French (1993, 1996) three‐factor model. For the empirical testing, size‐sorted sub‐samples that are rebalanced annually are employed, and in addition, adjustments for thin and infrequent trading are made to the data. The results indicate that serial correlation is present in equity returns and that it leads to significant short‐run contrarian profits that persist even after we adjust for market frictions. Consistent with findings for the US market, contrarian profits decline as one moves from small stocks to large stocks, but only when market frictions are considered. Furthermore, the contribution to contrarian profits due to the overreaction to the firm‐specific component appears larger than the underreaction to the common factors.     

On Persistence in Mutual Fund Performance

Using a sample free of survivor bias, I demonstrate that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Hendricks, Patel and Zeckhauser's (1993) “hot hands” result is mostly driven by the one-year momentum effect of Jegadeesh and Titman (1993) , but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.     

Trading Profits in Dutch Auction Self-Tender Offers

We document abnormal trading profits in Dutch auction self-tenders. Tender period profits—buying after announcement and selling just before expiration—are 1.74 percent ( Bhagat, Brickley, and Lowenstein (1987) report similar profits for interfirm tenders). Buying just before expiration and tendering yields abnormal profits of 1.36 percent ( Lakonishok and Vermaelen (1990) report 9 percent for fixed-price self-tenders using a filter rule). Total profits from buying just after announcement and tendering remain positive after adjusting for bid-ask spreads. Trading profits are higher for smaller firms, and positively correlated with tender period unsystematic risk, suggesting that they arise due to the pricing of event risk.     

Price and earnings momentum: An explanation using return decomposition

We explain price and earnings momentum by investigating dynamics of cash flow (CF) news and discount rate (DR) news. We find that before the holding period, winners experience higher DR news than losers, which makes winners display lower ex-ante expected returns than losers. Momentum returns come from the persistently higher CF news for winners as compared to losers both before and during the holding periods. The evidence favors a behavioral explanation that the market incorporates cash flow information too slowly, which drives momentum returns. In addition, we find that the DR news, in particular that of the momentum losers, drives the time-series profitability of momentum strategies. Furthermore, by comparing price momentum with earnings momentum, we show that the relative load on past CF news as compared to past DR news affects long-run portfolio performance.     

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.     

Firm-specific attributes and the cross-section of momentum

This paper identifies observable firm-specific attributes that drive momentum. We find that a firm's revenues, costs, and growth options combine to determine the dynamics of its return autocorrelation. We use these insights to implement momentum strategies (buying winners and selling losers) with both numerically simulated returns and CRSP/Compustat data. In both sets of data, momentum strategies that use firms with high revenue growth volatility, low costs, or valuable growth options outperform traditional momentum strategies by approximately 5% per year.     

Tests of the Contrarian Investment Strategy Evidence from the French and German stock markets

The Contrarian Investment Strategy (CIS) implies simultaneously buying previous losers and selling previous winners. This paper examines the CIS as first proposed by DeBondt and Thaler (1985)(Journal of Finance 40, 793–808) in an effort to expand and complement existing research. Results from our risk-adjusted, nonparametric, multifactor, bootstrap-simulated estimates show that, for both the French and German stock markets, short-term contrarian portfolios work best. Overall, the highest contrarian profits are obtained in the short run and the profits decrease over time. In addition, higher returns are not correlated to increases in the risk coefficients, which is consistent with investor overreaction.