Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics
State Street Global Advisors
University of California, Davis
September 7, 2011
Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.
Number of Pages in PDF File: 48
Keywords: Momentum, Past Returns, Volatility, Stock-Level Characteristics, Double Sorts
JEL Classification: G11, G12, G14
Date posted: December 23, 2010 ; Last revised: September 12, 2011
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