Feasible momentum strategies in the US stock market

Abstract

Although there is a large literature documenting the profitability of momentum strategies, their implementation is afflicted with many difficulties. Most importantly, high turnover and costs to hold short positions, especially in small-cap stocks, result in high transaction costs. We restrict our investment universe to large-capitalized stocks included in the Standard and Poor's (S&P) 100 index. Moreover, we implement simple investment strategies that invest long in single stocks and short in the stock index. Such simple and cost-saving momentum strategies generate economically high and statistically significant abnormal returns. These results are robust to various risk-adjustments including the CAPM, the Fama–French (1993) three-factor model, and a conditional version of the Fama and French (1993) three-factor model.

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Notes

  1. 1.

    In contrast, as indicated above, Grinblatt and Moskowitz (2004) and Ali and Trombley (2006) show that the profitability of momentum strategies stems to a large extent from short positions in small and illiquid stocks.

  2. 2.

    For example, a strategy with a holding period of K=3 months has three investment strands. One investment was established 2 months ago, and will not be changed for another month. The second investment was established 1 month ago is kept for another 2 months. The position in the third investment strand, which was established 3 months ago, will be divested and its proceeds invested in the stocks and/or index according to the investment rule. This position will then be hold for the next 3 months.

  3. 3.

    The choice of the calendar month does not have a major impact on the results. For the reported strategies, the rebalancing month is July.

  4. 4.

    Column 1 reproduces the results in Column 1 of Table 1 for ease of comparison.

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Acknowledgements

We are grateful to David Rey, Evert Wipplinger, and seminar participants at a joint research workshop of the University of St Gallen and the University of Konstanz for valuable comments.

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Correspondence to Markus M Schmid.

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2works as a research assistant in the Swiss Institute of Banking and Finance at the University of St Gallen. He studied Engineering and Business Administration at the University of Karlsruhe and was a Fulbright scholar when visiting the University of North Carolina, Chapel Hill. After obtaining his diploma in 2006, he worked for Sal. Oppenheim in the Quantitative Research department as analyst until December 2007. He is currently enrolled in the doctoral program of the University of St Gallen with a special interest in portfolio management, momentum trading strategies and performance fee structures.

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Ammann, M., Moellenbeck, M. & Schmid, M. Feasible momentum strategies in the US stock market. J Asset Manag 11, 362–374 (2011). https://doi.org/10.1057/jam.2010.22

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Keywords

  • momentum strategies
  • large-cap stocks
  • stock market predictability