An anatomy of trading strategies

In this article we use a single unifying framework to analyzethe sources of profits to a wide spectrum of return-based tradingstrategies implemented in the literature. We show that lessthan 50% of the 120 strategies implemented in the article yieldstatistically significant profits and, unconditionally, momentumand contrarian strategies are equally likely to be successful.However, when we condition on the return horizon (short, medium,or long) of the strategy, or the time period during which itis implemented, two patterns emerge. A momentum strategy isusually profitable at the medium (3- to 12-months) horizon,while a contrarian strategy nets statistically significant profitsat long horizons, but only during the 1926-1947 subperiod. Moreimportantly, our results show that the cross-sectional variationin the mean returns of individual securities included in thesestrategies play an important role in their profitability. Thecross-sectional variation can potentially account for the profitabilityof momentum strategies and it is also responsible for attenuatingthe profits from price reversals to long-horizon contrarianstrategies.