Extensive data mining greatly increases the odds that favorable results may be due to chance. In the turn-of-the-year or January effect, investors engage in year-end tax-loss selling. They hold on to their strongest stocks and may buy more as replacements for the stocks they sell.
This can create abnormal profits in these stronger stocks. Window dressing to make quarter-end portfolios look more attractive may also cause investment professionals to sell losers and buy winners before the end of the quarter. There is very little risk-adjusted improvement over agnostic generic momentum as you can see from the increase of only. But since portfolios are rebalanced quarterly anyway, there should be no harm in picking non-calendar ending quarters to do it.
The combined portfolio return is higher than momentum or value on their own. The combined portfolio has less tracking error vis-a-vis the broad market. Combining value and momentum also shortens both the length and depth of periods of benchmark underperformance.
But volatility and drawdowns are still high. If the moving average is less than zero, they hold Treasury bills. Using this trend filter, the worst drawdown of the combined approach goes from But investors give up 1. My research shows that trend-following is more effective when applied to broad stock indices.
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The reason for this has to do with volatility. Higher volatility means you give up more profit before you can exit or re-enter stocks when using a trend following filter. This is why combined stock portfolio investors give up 1.
Introduction to Momentum Trading
One cannot stress often enough the warning that myopic investors give up potentially superior results when they become nervous or impatient and abandon their strategies. These include earnings momentum, proximity to week highs, stop losses, and absolute strength. Otherwise, their analysis here is very good. You must be logged in to post a comment. Skip to content. Book Review of Quantitative Momentum. Oct 17 Related Posts.
Leave a Reply Cancel reply You must be logged in to post a comment. We present various robustness checks, long-horizon results, evidence on seasonality, and control for size-, book-to-market-, and industry-effects.
Working Papers & Publications
We argue that our results are useful to empirically evaluate competing explanations for the momentum effect. Unable to display preview. Download preview PDF.
Skip to main content. Advertisement Hide. Article First Online: 09 November This is a preview of subscription content, log in to check access. Ajinkya, Bipin B. CrossRef Google Scholar. Alexander, Gordon J. Google Scholar. Banz, Rolf , The relationship between return and market value of common stocks, in: Journal of Financial Economics, Vol. Berk, Jonathan B. Campbell, John Y. Craig , The Econometrics of Financial Markets. Chui, Andy C. Cochrane, John H.
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Edwards, Ward , Conservatism in human information processing, in: Kleinmuntz, Benjamin ed. Grundy, Bruce D. Spencer , Understanding the nature of the risks and the source of the rewards to momentum investing, in: Review of Financial Studies, Vol.