This paper provides significant extensions and tests of momentum trading strategies based on relative prices that were first explored by George and Hwang (2004). We develop new momentum strategies based on the ratio of the current stock price to each of five different reference points in past prices: 52-week high, 52-week median, 52-week low, half-year high, and 2-year high. We measure their investment performance on the basis of the Fama and French 3-Factor and Momentum Model (Carhart four-factor model), and further employ the technique of nested trading strategies to measure incremental performance. The strategy based on the ratio of current stock price to its 52-week high price is the most profitable, and its performance is robust when tested over a wide range of financial and economic factors. Our results provide strong new evidence of the investment merits of a momentum trading strategy based on the 52-week high price ratio, and add new weight to challenges to the hypothesis that the stock market is efficient in the semi-strong sense.
Review of Quantitative Finance and Accounting – Springer Journals
Published: May 19, 2011
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