Industry momentum strategies and autocorrelations in stock returns |
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| Institution: | 1. Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands;2. Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong;1. University of the Witwatersrand & 27four Investment Managers South Africa;2. University of the Witwatersrand South Africa;3. University of the Witwatersrand South Africa;1. Department of Accounting and Finance, Strathclyde Business School, University of Strathclyde, 199 Cathedral street, Glasgow, G4 0QU, Scotland, UK;2. College of Business, Korea Advanced Institute of Science and Technology; 85 Hoegiro, Dongdaemoon-gu, Seoul, 02455, South Korea |
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| Abstract: | 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. |
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