Price Momentum and Trading Volume

This study shows that past trading volume provides an important link between 'momentum' and 'value' strategies. Specifically, we find that firms with high (low) past turnover ratios exhibit many glamour (value) characteristics, earn lower (higher) future returns, and have consistently more negative (positive) earnings surprises over the next eight quarters. Past trading volume also predicts both the magnitude and persistence of price momentum. Specifically, price momentum effects reverse over the next five years, and high (low) volume winners (losers) experience faster reversals. Collectively, our findings show that past volume helps to reconcile intermediate-horizon 'underreaction' and long-horizon 'overreaction' effects.     

Institutional Herding in the ADR Market

This study examines institutional herding in the ADR market between 1985 and 1998. We find a significant positive relation between changes in institutional ownership and ADR returns over the same period. The positive relation persists after we control for the momentum effect in the US stock markets. We also find that in the ADR market, past winners (losers) in the herding period continue to be the winners (losers) in the post-herding period. The lack of a returns reversal suggests institutional herding is related to momentum trading. However, the positive relation between institutional ownership changes and ADR returns remains after controlling for momentum trading in the ADR market. Our results also rule out that positive feedback trading is related to institutional herding in the ADR market.     

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.     

Extreme volumes and expected stock returns: Evidence from China's stock market

We examine the relation between extreme trading volumes and expected returns for individual stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange over the July 1994–December 2000 interval. Contrasted with the evidence obtained from the US data [J. Finance 56 (2001) 877], our results show that stocks experiencing extremely high (low) volumes are associated with low (high) subsequent returns. Moreover, this extreme volume–return relation significantly co-varies with security characteristics like past stock performance, firm size, and book-to-market values. In particular, stocks with extreme volumes are related to poorer performance if they are past winners, large firms, and glamour stocks than if they are past losers, small firms, and value stocks, respectively. These results are robust to both daily and weekly samples as well as stock exchange sub-samples. Although the liquidity premium hypothesis of Amihud and Mendelson [J. Financ. Econ. 17 (1986) 223] provides a partial explanation for the extreme volume–return relation, our results fit better the behavioral hypothesis of Baker and Stein [J. Financ. Mark. 7 (2004) 271].     

Asymmetric dynamics of stock price continuation

This paper finds that the dynamics of stock price continuation are asymmetrical, in terms of both business cycles and past performances. During times of recession, stock returns are explained differently for past losers and winners; the level of credit quality dominates the return dynamics for extreme losers, while levels of information-based trading activity and information ambiguity contribute to winners’ medium-term returns. Such asymmetry is proposed as the source of insignificant profits achieved using conventional momentum strategies. On the other hand, in times of expansion, conventional asset pricing factors are found to affect stock returns with a dependence on the level of credit quality; this suggests that more profitable momentum strategies remain to be discovered.     

The fundamentals of momentum investing: European evidence on understanding momentum through fundamentals

This paper tests Ahmed and Safdar's noise‐related fundamentals‐based explanation for the momentum premium in European equity markets. Consistent with the view that past price changes may be partially driven by noise, the future return behaviour of winners and losers is significantly dependent upon the degree to which past price performance is consistent with fundamentals. European momentum profits are concentrated among those firms where past price performance is congruent with fundamentals, but absent among those firms where past price performance is incongruent with fundamentals. The significantly different momentum premiums on congruent and incongruent fundamentals‐momentum strategies are attributable to the exploitation of existing mispricing among momentum stocks that can be ex ante identified using firm fundamentals.     

Volume for Winners and Losers: Taxation and Other Motives for Stock Trading

Capital gains taxes create incentives to trade. Our major finding is that turnover is higher for winners (stocks, the prices of which have increased) than for losers, which is not consistent with the tax prediction. However, the turnover in December and January is evidence of tax-motivated trading; there is a relatively high turnover for losers in December and for winners in January. We conclude that taxes influence turnover, but other motives for trading are more important. We were unable to find evidence that changing the length of the holding period required to qualify for long-term capital gains treatment affected turnover.     

Capital gains tax,supply‐driven trading and ownership structure: direct evidence of the lock‐in effect

This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long‐term capital gains increases the supply of shares that qualify for long‐term status, thereby causing downward price pressure. We find evidence of abnormal seller‐initiated trading following the 12‐month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller‐initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long‐term tax status.     

Momentum profits in the Australian equity market: A matched firm approach

This paper examines momentum trading strategies within the Australian equity market over the period 1990 to 2007, inclusive. We analyse excess returns employing both Jegadeesh and Titman's (Jegadeesh, N., Titman, S., 1993. “Returns to buying winners and selling losers: implications for stock market efficiency”. The Journal of Finance, 48:65–91) zero cost investment portfolio approach and a matched control firm approach. We also allow for short sale restrictions, liquidity constraints and transaction costs in the form of bid-ask spreads. Testing reveals that both the Jegadeesh and Titman (Jegadeesh, N., and Titman, S. (1993). “Returns to buying winners and selling losers: implications for stock market efficiency”. The Journal of Finance, 48:65–91.) zero cost investment portfolio approach and the matched control firm approach yield excess profits. While the implementation of short sale restraints increases momentum profitability, the subsequent inclusion of bid-ask spreads results in a reduction in these gains. Further, we find that executing a momentum strategy in Australia results in statistically significant dollar profits.     

Volatilities and Momentum Returns in Real Estate Investment Trusts

We examine the relation of time-varying idiosyncratic risk and momentum returns in REITs using a GARCH-in-mean model and incorporate liquidity risk in the asset pricing model. This is important because illiquidity may be more severe for REITs due to the nature of their underlying assets. We find that momentum returns display asymmetric volatility, i.e., momentum returns are higher when volatility is higher. Additionally, we find evidence that REITs with lowest past returns (losers) have higher idiosyncratic risks than those with highest past returns (winners) and that investors require a lower risk premium for holding losers’ idiosyncratic risks. Therefore, although losers have higher levels of idiosyncratic risks, their low risk premia cause low returns, which contribute to momentum. Lastly, we find a positive relation between REITs’ momentum return and turnover.     

Investor heterogeneity and momentum-based trading strategies in China

The conventional momentum strategy performs poorly overall in China, because stock prices behave very differently when markets are open for trading versus when they are closed. Stocks that are past intraday (overnight) winners persistently outperform those that are past intraday (overnight) losers in the subsequent intraday (overnight) periods. However, the same intraday- (overnight-) momentum strategy suffers dramatically in the subsequent overnight (intraday) periods. Further analysis shows that past intraday (overnight) winners tend to be more (less) speculative stocks which are highly demanded during the day (night). Overall, our results are consistent with investor heterogeneity, and this persistent tug of war virtually eliminates the effectiveness of investors pursuing the momentum-based trading strategy in China.     

Non-parametric momentum based on ranks and signs

This study proposes alternative momentum strategies built on the rank and sign of daily returns. Rank and sign momentum strategies are robust to the presence of extreme price movements. They generate significant profits for short-term holding periods and exhibit no long-term return reversals. More importantly, they subsume traditional price momentum, but not vice versa. In addition, rank and sign momentum strategies experience much weaker momentum crashes. Further evidence indicates that rank and sign momentum profitability is less vulnerable to salient past returns while traditional price momentum winners (losers) tend to be overvalued (undervalued) when they face a higher degree of salience.     

Tax-Induced Trading: The Effect of the 1986 Tax Reform Act on Stock Market Activity

The end of favorable tax treatment for long-term capital gains caused investors to reassess traditional tax-induced trading strategies. This study compares trading behavior in December 1986 and January 1987 with previous years. Our results indicate that these tax code changes had a powerful effect on trading behavior. Relative trading volume was considerably higher in December 1986 for long-term winners but not significantly lower for long-term losers. Results also indicate altered trading patterns based on short-term gains in December 1986 and for long-term winners in January 1987.     

Firm characteristics that drive the momentum pattern in the UK stock market

Previous studies have estimated the company characteristics of previous winners and losers to explore the momentum effect. Using UK data, this study focuses on the characteristics of companies that actually generate the momentum pattern. These are previous winners who keep performing well (WW) and past losers who consistently perform poorly (LL). This study illustrates that WW and LL firms may exhibit market-based characteristics similar to those of young, low-priced, small capitalisation companies, but that there are significant differences. Accounting and fundamental signals (e.g. profitability, value/growth) tend to distinguish winners from losers. Based on firm characteristics, we further develop investment strategies that can outperform significantly the profitability of the momentum strategy.     

Sources of gains to shareholders from bankruptcy resolution

Using a logistic regression model, we identify the characteristics of firms whose shareholders are likely to benefit from bankruptcy resolution. That is, winners (losers) are firms whose shareholders experience positive (negative) excess returns after bankruptcy filing. We find that winners are relatively smaller firms with higher proportions of convertible debt, tend to file for bankruptcy for strategic reasons, have low share-ownership concentration, and suffer comparatively larger pre-filing stock price declines. Among winners, shareholder returns are greater for firms that have higher levels of private debt and research and development (R&D) expenditures, and operate in more concentrated industries. In addition, our analysis indicates that an ex ante trading strategy of purchasing bankrupt stocks with a greater than 50% probability of being a winner on the day after bankruptcy filing and holding the stocks for a year, on an average, can generate average compounded and excess compounded holding-period returns of +71% and +42%, respectively.     

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.     

Does the Momentum Strategy Work Universally? Evidence from the Japanese Stock Market

This paper investigates effectiveness of momentum strategies in the Japanese stock market during the period of 1975 to 1997. The main findings of this research are that momentum strategy portfolios which invest in past three-to-twelve month winners and sell past three-to-twelve month losers lose about 0.5% per month over the subsequent three to twelve months. This means that stock prices in the Japanese stock market reverse rather than continue over a medium-term horizon. The most significant reversal pattern is observed at the first month of portfolio formation and is unique to small stocks. Even with the market risk and size factor controlled, the price reversal is still present.     

Momentum profits and time-varying unsystematic risk

This study assesses whether the widely documented momentum profits can be attributed to time-varying risk as described by a GJR-GARCH(1,1)-M model. We reveal that momentum profits are a compensation for time-varying unsystematic risks, which are common to the winner and loser stocks but affect the former more than the latter. In addition, we find that, perhaps because losers have a higher propensity than winners to disclose bad news, negative return shocks increase their volatility more than they increase those of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners.     

Difference in interim performance and risk taking with short-sale constraints

Absent much theory, empirical works often rely on the following informal reasoning when looking for evidence of a mutual fund tournament: If there is a tournament, interim winners have incentives to decrease their portfolio volatility as they attempt to protect their lead, while interim losers are expected to increase their volatility so as to catch up with winners. We consider a rational model of a mutual fund tournament in the presence of short-sale constraints and find the opposite: Interim winners choose more volatile portfolios in equilibrium than interim losers. Several empirical works present evidence consistent with our model. However, based on the above informal argument, they appear to conclude against the tournament behavior. We argue that this conclusion is unwarranted. We also demonstrate that tournament incentives lead to differences in interim performance for otherwise identical managers and that mid-year trading volume is inversely related to mid-year stock return.     

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.