mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/F-F_Momentum_Factor.zip). The momentum factor is however still a strong performance contributor in long only portfolios (formed as long stocks with the strongest momentum without shorting market or low momentum stocks).

Keywords:

Simple trading strategy

Source Paper

Abstract:

There is substantial evidence that indicates that stocks that perform the best (worst) over a three- to 12-month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the evidence of price and earnings momentum and the potential explanations for the momentum effect.

Other Papers

Griffin, Ji, Martin: Global Momentum Strategies: A Portfolio Perspective

Abstract:

We provide practical perspectives on momentum investing in stocks internationally. First, momentum is generally more profitable on the long side than on the short side, making it accessible to a broad range of institutional capital. Second, both price and earnings momentum profits are significant globally. Third, internationally, earnings momentum

is distinct from price momentum, and using price and earnings momentum in conjunction produces larger economic profits. Fourth, momentum profits have weaker co-movements across markets than market indices. Interestingly, while market correlations are much higher in down markets than in up markets, momentum correlations are low in both market conditions. Fifth, momentum strategies do not differ appreciably in profitability between up and down markets, which means timing is less important to momentum traders. Finally, momentum strategies are not riskless-historically there have often occurred periods of several months where they have netted low or negative returns. Altogether, these findings suggest that momentum is useful in international portfolio management, but its implementation should be thoughtfully considered.

Korajczyk, Sadka: Are Momentum Profits Robust to Trading Costs?

Abstract:

This paper tests whether momentum-based strategies remain profitable after considering market frictions, in particular price concessions induced by trading. Alternative measures of price impact are estimated and applied to alternative momentum-based trading rules. The performance of traditional momentum strategies, in addition to strategies designed to reduce the cost of trades, is evaluated. We find that, after taking into account the price impact induced by trades, as much as 5 billion dollars (relative to December 1999 market capitalization) may be invested in some momentum-based strategies before the apparent profit opportunities vanish. Other, extensively studied, momentum strategies are not implementable on a large scale. The persistence of momentum returns exhibited in the data remains an important challenge to the asset-pricing literature.

Jagadeesh, Titman: Momentum (2011 version)

Abstract:

There is substantial evidence that indicates that stocks that perform the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Up until recently, trading strategies that exploit this phenomenon were consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the momentum literature and discusses some of the explanations for this phenomenon.

Israel, Moskowitz: How Tax Efficient are Equity Styles?

Abstract:

We examine the tax efficiency and after-tax performance of long only equity styles. On an after-tax basis, value and momentum portfolios outperform, and growth underperforms, the market. We find that momentum, despite its higher turnover, is often more tax efficient than value, because it generates substantial short-term losses and lower dividend income. Tax optimization improves the returns to all equity styles, with the biggest improvements accruing to value and momentum styles. However, only momentum allows significant tax minimization without incurring significant style drift. This is because managing gain and loss realization incurs less tracking error than avoiding dividend income and momentum’s tax exposure is primarily capital gains, while value and growth’s tax exposures are more sensitive to dividends. The effect of taxes across equity styles are magnified within a broader asset allocation framework and in down markets.

Boynton, Jordan: Are momentum premia robust to trade frictions? Tests of large-stock portfolios

Abstract@

We test how market frictions might limit momentum profits. While most papers assume that investors can self-finance, in practice, investors must invest capital or borrow for long stock positions. No self-financing can occur. Traders can borrow to buy longs, short losers, and earn the rebate interest on the short sale proceeds. We find that the difference between the margin and rebates rates is 139 bp for 1946-2002. We test on large stocks where trade and costs are lower and price impact costs are minimal. Net of trade and borrowing costs, large stock momentum earns, on a raw return basis, 5% per unit of borrowed capital annually. Risk-adjusted tests show larger premia.

Maymin, Maymin, Fisher: Momentum’s Hidden Sensitivity to the Starting Day

Abstract:

We show that the profitability of time-series momentum strategies on commodity futures across their entire history is strongly sensitive to the starting day. Using daily returns with 252-day formation periods and 21-day holding periods, the Sharpe ratio depends on whether one starts on the first day, the second day, and so on, until the twenty first day. This sensitivity is higher for shorter trading periods. The same results also hold in simulation of independent and identically lognormally distributed returns, showing that this is not only an empirical pattern but a fundamental issue with momentum strategies. Portfolio managers should be aware of this latent risk: starting trading the same strategy on the same underlying but one day later could, even after many decades, turn a successful strategy into an unsuccessful one.

Lewis: Relative Strength and Portfolio Management

Abstract:

This paper presents the results of several relative strength (momentum) strategies tested in a real world portfolio management setting. Monte Carlo simulations are used to determine the possible range of outcomes if a portfolio manager selects a subset of high relative strength (momentum) securities over time. A testing protocol that rebalances the portfolio on a continuous basis is also used to simulate real world portfolio management practices.

Barroso, Santa-Clara: Managing the Risk of Momentum

Abstract:

Compared to the market, value or size risk factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors with reasonable risk aversion. We find that the risk of momentum is highly variable over time and quite predictable. The major source of predictability does not come from systematic risk but from specific risk. Managing this time-varying risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.

Rachwalski, Wen: Momentum, Risk and Underreaction

Abstract:

Momentum profits can be explained by exposure to risks omitted from common factor models and underreaction to innovations in these omitted risks. Consistent with risk as a partial explanation of momentum profits, long formation period momentum strategies earn higher returns and are more highly correlated with factors designed to measure risk than short formation period momentum strategies.

Landis, Skouras: Momentum is Higher Than We Think

Abstract:

This paper evaluates Momentum on international markets based on data from Thompson Datastream (TDS). Using a complete …ltered and corrected daily database from 52 International markets, and more than 50.000 common stocks, from TDS, we re-examine previous empirical work on International Momentum and document consistently higher momentum returns for the majority of markets and regions of our sample. We find evidence that data outliers create a Pseudo-Reversal effect in international Winner minus Loser profits, reflecting in the overestimation of premiums of loser portfolios and the underestimation of the pro…ts of the momentum strategies. Moreover, we revise International Momentum premiums from 1964 to 2010, for all markets and regions of our sample and document that momentum continues to be strong in the majority of individual markets and all in regions except Japan.

Li, Brooks, Miffre: Low-Cost Momentum Strategies

Abstract:

The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement, should asset managers decide to adopt low-cost relative-strength strategies.

Henker, Martens, Huynh: The Vanishing Abnormal Returns of Momentum Strategies and ‘Front-Running’ Momentum Strategies

Abstract:

We find large variations in returns from momentum strategies. Momentum strategies did not earn significant returns during the period of 1993-2004 which was due to their poor performance over the period from 2001-2004. We find that the previously documented large firm momentum effect is sensitive to the momentum strategy examined, and is in our sample driven by the abnormal returns of large Nasdaq stocks. We also evaluate momentum strategies that do not adhere to the end of month portfolio formation universally used in the academic literature. To this end we form portfolios one week prior to the end of month and call them ‘front-running’ momentum portfolios. Consistent with institutional momentum trading affecting end of month returns and volatility, we find that ‘front-running’ a momentum strategy generates similar, but less volatile returns than the month-end strategy. Pertinently, the returns of a ‘front-running’ strategy are consistently less volatile than that of an equivalent month-end strategy.

Israel, Moskowitz: The Role of Shorting, Firm Size, and Time on Market Anomalies

Abstract:

We examine the role of shorting, firm size, and time on the profitability of size, value, and momentum strategies. We find that long positions comprise almost all of size, 60% of value, and half of momentum profits. Shorting becomes less important for momentum and more important for value as firm size decreases. The value premium decreases with firm size and is weak among the largest stocks. Momentum profits, however, exhibit no reliable relation with size. These effects are robust over 86 years of U.S. equity data and almost 40 years of data across four international equity markets and five asset classes. Variation over time and across markets of these effects is consistent with random chance. We find little evidence that size, value, and momentum returns are significantly affected by changes in trading costs or institutional and hedge fund ownership over time.

Frazzini, Israel, Moskowitz: Trading Costs of Asset Pricing Anomalies

Abstract:

Using nearly a trillion dollars of live trading data from a large institutional money manager across 19 developed equity markets over the period 1998 to 2011, we measure the real-world transactions costs and price impact function facing an arbitrageur and apply them to size, value, momentum, and short-term reversal strategies. We find that actual trading costs are less than a tenth as large as, and therefore the potential scale of these strategies is more than an order of magnitude larger than, previous studies suggest. Furthermore, strategies designed to reduce transactions costs can increase net returns and capacity substantially, without incurring significant style drift. Results vary across styles, with value and momentum being more scalable than size, and short-term reversals being the most constrained by trading costs. We conclude that the main anomalies to standard asset pricing models are robust, implementable, and sizeable.

Liu: Explaining Momentum within an Existing Risk Factor Model

Abstract:

I propose that abnormal returns generated by price momentum can be explained within the framework of an existing risk factor model such as the Fama-French three- factor model. Two features of a systematic factor, weakly positive autocorrelation and the leverage effect, generate a small positive alpha in the factor portfolio scaled by its own past returns. The momentum portfolio magnifies this alpha by taking long positions in stocks with highly positive (negative) betas and short positions in stocks with highly negative betas given a positive (negative) realized factor return. Time-varying stock betas enhance the degree of magnification significantly. I demonstrate that a simulated market in which asset returns obey the CAPM or the three-factor model can produce realistic momentum dynamics and substantial abnormal profits. In empirical tests, I show that a replicating portfolio with time-varying betas accounts for 50% of the Fama-French alpha of the canonical momentum portfolio and 75% of the value-weighted momentum portfolio. Among firms larger than the NYSE median, the momentum strategy is no longer profitable after taking into account the dynamic replicating portfolio. The residual alpha can be attributed to small firms suffering recent losses and can be completely explained away with the addition of a financial distress factor.

Cheema: Three Essays on Momentum Returns

Abstract:

This dissertation consists of three essays on momentum returns. The first essay is entitled ‘Momentum Returns, Market States and the Global Financial Crisis’. This essay investigates the profitability of the momentum trading strategy in the stock exchanges of Shanghai, Shenzhen and Hong Kong over the period 1994 to 2010. In the second essay, entitled ‘Momentum Returns and Information Uncertainty’, I study the impact of information uncertainty on the profitability of the momentum trading strategy. In the third and final essay, entitled ‘Momentum Returns, Long-Term Reversal and Idiosyncratic Volatility’, I study the impact of idiosyncratic volatility (IV) on the profitability of momentum and long-term reversal trading strategies in China over the period 1994 to 2010.

Cakici, Tan: Size, Value, and Momentum in Developed Country Equity Returns: Macroeconomic and Liquidity Exposures

Abstract:

The paper investigates value and momentum factors in 23 developed international stock markets. We find that typically value and momentum premia are smaller and more negatively correlated for large market capitalization stocks relative to small. Momentum factors are more highly correlated internationally relative to value. We provide international evidence on three sets of risk exposures of value and momentum returns: macroeconomic risk, funding liquidity risk, and stock market liquidity risk. We find that value returns are typically lower prior to a recession while momentum returns often exhibit little sensitivity. Value returns are typically lower in times of poor funding liquidity, whereas, with notable exceptions, momentum returns are typically unaffected. Lastly, for almost all countries, value returns are high in poor stock market liquidity conditions. The same result appears to be true for momentum in Asia Pacific, North America, and largely in Europe.

Jensen-Gaard: Equity Investment Styles — Recent evidence on the existence and cyclicality of investment styles

Abstract:

Over the past two decades, financial academics and investment professionals have documented several anomalies on the global financial markets. A subset of these anomalies, known as equity style strategies, has been shown to yield substantial excess returns, which cannot be explained by traditional finance theory. However, in the light of the financial turmoil during the 2000s, several studies have shown considerable changes in the magnitude of the style-based strategy premiums. The purpose of this thesis is to investigate whether recent data support the continued existence of these premiums and evaluate how these premiums fluctuate in relation to the economic cycle. Furthermore, this thesis provides practical advice on how investors can apply the findings.

Asness, Frazzini, Israel, Moskowitz: Fact, Fiction and Momentum Investing

Abstract:

It’s been over 20 years since the academic discovery of momentum investing (Jegadeesh and Titman (1993), Asness (1994)), yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases “confusion and debate” is us attempting to be polite, as it is near impossible for informed practitioners and academics to still believe some of the myths uttered about momentum — but that impossibility is often belied by real world statements. In this article, we aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. We highlight ten myths about momentum and refute them, using results from widely circulated academic papers and analysis from the simplest and best publicly available data.

Herberger, Kohlert: Trading inTurbulent Markets: Does Momentum Work? (page 53 — 65)

Abstract:

Identifying ways to successfully predict security returns based on past returns is a major objective ofinvestment research. One ofthe most impor-tant strategies, that ofmomentum (Levy, 1967; Jegadeesh and Titman,1993; Oehler et al. 2003), is employed in this chapter. Using NYSE datafrom December 1994 to May 2009, we analyze whether buying stocks that have performed well in the past and selling stocks that have performedpoorly in the past can generate significant positive returns, even in a turbu-lent market phase. Our findings suggest that investors using momentumstrategies could have indeed generated superior returns during that timeperiod.

Foltice, Langer: Profitable Momentum Trading Strategies for Individual Investors

For nearly three decades, scientific studies have explored momentum investing strategies and observed stable excess returns in various financial markets. However, the trading strategies typically analyzed in such research are not accessible to individual investors due to short selling constraints, nor are they profitable due to high trading costs. Incorporating these constraints, we suggest and explore a simplified momentum trading strategy that only exploits excess returns from topside momentum for a small number of individual stocks. Building on US data from the New York Stock Exchange from 1991-2010, we analyze whether such a simplified momentum strategy outperforms the benchmark after factoring in realistic transaction costs and risks. We find that it is indeed possible for individual investors with initial investment amounts of at least $5,000. In further attempts to improve this practical trading strategy we also analyze an overlapping momentum trading strategy consisting of a more frequent trading of a smaller number of “winner” stocks. We find that increasing the trading frequency initially increases the risk-adjusted returns of these portfolios up to an optimal point when excessive transaction costs begin to dominate the scene. In a calibration study, we find that, depending on the initial investment amount of the portfolio, the optimal momentum trading frequency ranges from bi-yearly to monthly.

Sarwar: Sources of Momentum Returns: A Decomposition of the Explained and the Unexplained Risk Factors

Abstract:

In this paper, I examine the sources of momentum returns and uncover a list of intriguing features. I find that when the momentum returns are decomposed the contributions of the explained and the unexplained risk factors depend on the level of analysis, the risk factors used, and the lag structure of the risk factors. Further, I find that at the individual stock level, the total contribution of the lagged macroeconomic risk factors is 59 percent per month but that the total contribution of the contemporaneous macroeconomic risk factors at the portfolio level is only 9 percent per month. These new findings add important insights to the existing momentum theories.