Momentum – Reversal Strategy

Abstract:     
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, G14

working papers series