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.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
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.
The choice of the calendar month does not have a major impact on the results. For the reported strategies, the rebalancing month is July.
Column 1 reproduces the results in Column 1 of Table 1 for ease of comparison.
Ali, A. and Trombley, M.A. (2006) Short sales constraints and momentum in stock returns. Journal of Business Finance & Accounting 33: 587–615.
Badrinath, S.G. and Wahal, S. (2002) Momentum trading by institutions. Journal of Finance 57: 2449–2478.
Carhart, M.M. (1997) On persistence in mutual fund performance. Journal of Finance 52: 57–82.
Chan, K.C.L., Jegadeesh, N. and Lakonishok, J. (1996) Momentum strategies. Journal of Finance 51: 1681–1712.
Chan, K.C.L., Jegadeesh, N. and Lakonishok, J. (1999) The profitability of momentum strategies. Financial Analysts Journal 55: 80–90.
Chen, H.-L., Jegadeesh, N. and Wermers, R. (2000) The value of active mutual fund management: An examination of the stockholdings and trades of fund managers. Journal of Financial and Quantitative Analysis 35: 343–368.
Chordia, T. and Shivakumar, L. (2002) Momentum, business cycle, and time-varying expected returns. Journal of Finance 57: 985–1019.
D'Avolio, G. (2002) The market for borrowing stock. Journal of Financial Economics 66: 271–306.
Fama, E.F. and French, K.R. (1993) Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33: 3–56.
Ferson, W. and Schadt, R. (1996) Measuring fund strategy and performance in changing economic conditions. Journal of Finance 51: 425–461.
Griffin, J.M., Xiuqing, J. and Spencer, M.J. (2003) Momentum investing and business cycle risk: Evidence from pole to pole. Journal of Finance 58: 2515–2547.
Griffin, J.M., Xiuqing, J. and Spencer, M.J. (2005) Global momentum strategies. Journal of Portfolio Management 31: 23–39.
Grinblatt, M. and Moskowitz, T.J. (2004) Predicting stock price movements from past returns: The role of consistency and tax-loss selling. Journal of Financial Economics 71: 541–579.
Grinblatt, M., Titman, S. and Wermers, R. (1995) Momentum investment strategies, portfolio performance and herding: A study of mutual fund behavior. American Economic Review 85: 1088–1105.
Grundy, B.D. and Martin, J.S. (2001) Understanding the nature of the risks and the source of the rewards to momentum investing. Review of Financial Studies 14: 29–78.
Jegadeesh, N. (1990) Evidence of predictable behavior of security returns. Journal of Finance 45: 881–898.
Jegadeesh, N. and Titman, S. (1993) Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance 48: 65–91.
Jegadeesh, N. and Titman, S. (1995) Overreaction, delayed reaction, and contrarian profits. Review of Financial Studies 8: 973–993.
Jegadeesh, N. and Titman, S. (2001) Profitability of momentum strategies: An evaluation of alternative explanations. Journal of Finance 56: 699–720.
Kat, H.M. and Miffre J. (2008) The impact of non-normality risks and tactical trading on hedge fund alphas. Journal of Alternative Investments 10: 8–21.
Korajczyk, R.A. and Sadka, R. (2006) Are momentum profits robust to trading costs? Journal of Finance 59: 1039–1082.
Lehmann, B.N. (1990) Fads, martingales, and market efficiency. Quarterly Journal of Economics 61: 1–28.
Lesmond, D.A., Schill, M.J. and Zhou, C. (2004) The illusory nature of momentum profits. Journal of Financial Economics 71: 349–380.
Li, X., Brooks, C. and Miffre, J. (2009) Low-cost momentum strategies. Journal of Asset Management 9: 366–379.
Lo, A.W. and MacKinlay, A.C. (1990) When are contrarian profits due to stock market overreaction? Review of Financial Studies 3: 175–205.
Rey, D.M. and Schmid, M.M. (2007) Feasible momentum strategies: Evidence from the Swiss stock market. Financial Markets and Portfolio Management 21: 325–352.
Rouwenhorst, K.G. (1998) International momentum strategies. Journal of Finance 53: 267–284.
Womack, K.L. (1996) Do brokesage analysts' recommendations have investment value? Journal of Finance 51: 137–167.
Wu, X. (2002) A conditional multifactor analysis of return momentum. Journal of Banking and Finance 26: 1675–1696.
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.
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.
About this article
Cite this article
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
- momentum strategies
- large-cap stocks
- stock market predictability