Abstract

http://ssrn.com/abstract=305282
 
 

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Are Momentum Profits Robust to Trading Costs?


Robert A. Korajczyk


Northwestern University - Kellogg School of Management

Ronnie Sadka


Boston College - Carroll School of Management

April 18, 2003

Northwestern University Department of Finance Working Paper No. 289; AFA 2003 Washington, DC Meetings

Abstract:     
This paper tests whether momentum-based strategies remain profitable after considering market frictions, in particular price concessions induced by trading. Alternative measures of price impact are estimated and applied to alternative momentum-based trading rules. The performance of traditional momentum strategies, in addition to strategies designed to reduce the cost of trades, is evaluated. We find that, after taking into account the price impact induced by trades, as much as 5 billion dollars (relative to December 1999 market capitalization) may be invested in some momentum-based strategies before the apparent profit opportunities vanish. Other, extensively studied, momentum strategies are not implementable on a large scale. The persistence of momentum returns exhibited in the data remains an important challenge to the asset-pricing literature.

Note: Previously titled On the Financial Significance of Momentum

Number of Pages in PDF File: 43

Keywords: Momentum strategies, Transaction costs, Price impact, Optimal trading, Market efficiency

JEL Classification: G11, G14

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Date posted: March 28, 2002  

Suggested Citation

Korajczyk, Robert A. and Sadka, Ronnie, Are Momentum Profits Robust to Trading Costs? (April 18, 2003). Northwestern University Department of Finance Working Paper No. 289; AFA 2003 Washington, DC Meetings. Available at SSRN: http://ssrn.com/abstract=305282 or http://dx.doi.org/10.2139/ssrn.305282

Contact Information

Robert A. Korajczyk (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)
Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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