Momentum – Reversal Strategy
National University of Kaohsiung
National Chung Cheng University
May 25, 2011
Various theories have been presented to explain momentum and reversals in stock returns. Based on the model of Hong and Stein (1999), this paper creates a hybrid strategy to avoid the losses from the reversal phase. The risk-adjusted returns of the new strategy are significantly higher than those of the traditional momentum strategy. Moreover, the risk-adjusted returns of the new strategy cannot be fully explained by Carhart’s four-factor model. Such a finding is robust in different time periods and size quintiles. Overall, this paper exploits the interaction between heterogeneous investors and generates distinctive applications.
Number of Pages in PDF File: 66
Keywords: Momentum; Reversal; Overreaction; Underreaction; Timing Ability
JEL Classification: G11, G12, G14working papers series
Date posted: August 22, 2010 ; Last revised: May 27, 2011
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