The illusory nature of momentum profits

The illusory nature of momentum profits Our paper re-examines the profitability of relative strength or momentum trading strategies (buying past strong performers and selling past weak performers). We find that standard relative strength strategies require frequent trading in disproportionately high cost securities such that trading costs prevent profitable strategy execution. In the cross-section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

The illusory nature of momentum profits

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Publisher
Elsevier
Copyright
Copyright © 2003 Elsevier B.V.
ISSN
0304-405x
DOI
10.1016/S0304-405X(03)00206-X
Publisher site
See Article on Publisher Site

Abstract

Our paper re-examines the profitability of relative strength or momentum trading strategies (buying past strong performers and selling past weak performers). We find that standard relative strength strategies require frequent trading in disproportionately high cost securities such that trading costs prevent profitable strategy execution. In the cross-section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs. We conclude that the magnitude of the abnormal returns associated with these trading strategies creates an illusion of profit opportunity when, in fact, none exists.

Journal

Journal of Financial EconomicsElsevier

Published: Feb 1, 2004

References

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