Skip to main content
SpringerLink
Log in

Feasible momentum strategies in the US stock market

  • Original Article
  • Published:
Journal of Asset Management Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2

Similar content being viewed by others

Notes

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

References

  • Ali, A. and Trombley, M.A. (2006) Short sales constraints and momentum in stock returns. Journal of Business Finance & Accounting 33: 587–615.

    Article  Google Scholar 

  • Badrinath, S.G. and Wahal, S. (2002) Momentum trading by institutions. Journal of Finance 57: 2449–2478.

    Article  Google Scholar 

  • Carhart, M.M. (1997) On persistence in mutual fund performance. Journal of Finance 52: 57–82.

    Article  Google Scholar 

  • Chan, K.C.L., Jegadeesh, N. and Lakonishok, J. (1996) Momentum strategies. Journal of Finance 51: 1681–1712.

    Article  Google Scholar 

  • Chan, K.C.L., Jegadeesh, N. and Lakonishok, J. (1999) The profitability of momentum strategies. Financial Analysts Journal 55: 80–90.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Chordia, T. and Shivakumar, L. (2002) Momentum, business cycle, and time-varying expected returns. Journal of Finance 57: 985–1019.

    Article  Google Scholar 

  • D'Avolio, G. (2002) The market for borrowing stock. Journal of Financial Economics 66: 271–306.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Ferson, W. and Schadt, R. (1996) Measuring fund strategy and performance in changing economic conditions. Journal of Finance 51: 425–461.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Griffin, J.M., Xiuqing, J. and Spencer, M.J. (2005) Global momentum strategies. Journal of Portfolio Management 31: 23–39.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Jegadeesh, N. (1990) Evidence of predictable behavior of security returns. Journal of Finance 45: 881–898.

    Article  Google Scholar 

  • Jegadeesh, N. and Titman, S. (1993) Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance 48: 65–91.

    Article  Google Scholar 

  • Jegadeesh, N. and Titman, S. (1995) Overreaction, delayed reaction, and contrarian profits. Review of Financial Studies 8: 973–993.

    Article  Google Scholar 

  • Jegadeesh, N. and Titman, S. (2001) Profitability of momentum strategies: An evaluation of alternative explanations. Journal of Finance 56: 699–720.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Korajczyk, R.A. and Sadka, R. (2006) Are momentum profits robust to trading costs? Journal of Finance 59: 1039–1082.

    Article  Google Scholar 

  • Lehmann, B.N. (1990) Fads, martingales, and market efficiency. Quarterly Journal of Economics 61: 1–28.

    Article  Google Scholar 

  • Lesmond, D.A., Schill, M.J. and Zhou, C. (2004) The illusory nature of momentum profits. Journal of Financial Economics 71: 349–380.

    Article  Google Scholar 

  • Li, X., Brooks, C. and Miffre, J. (2009) Low-cost momentum strategies. Journal of Asset Management 9: 366–379.

    Article  Google Scholar 

  • Lo, A.W. and MacKinlay, A.C. (1990) When are contrarian profits due to stock market overreaction? Review of Financial Studies 3: 175–205.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Rouwenhorst, K.G. (1998) International momentum strategies. Journal of Finance 53: 267–284.

    Article  Google Scholar 

  • Womack, K.L. (1996) Do brokesage analysts' recommendations have investment value? Journal of Finance 51: 137–167.

    Article  Google Scholar 

  • Wu, X. (2002) A conditional multifactor analysis of return momentum. Journal of Banking and Finance 26: 1675–1696.

    Article  Google Scholar 

Download references

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.

Author information

Authors and Affiliations

  1. University of Mannheim, Finance Area, Chair for Business Administration and Corporate Governance,, D-68131, Mannheim, Germany

    Markus M Schmid

Authors
  1. Manuel Ammann
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Marcel Moellenbeck
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Markus M Schmid
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Markus M Schmid.

Additional information

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.

Rights and permissions

Reprints and permissions

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

Download citation

  • Received:

  • Revised:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jam.2010.22

Keywords

Search

Navigation