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Are Momentum Profits Robust to Trading Costs?Robert A. KorajczykNorthwestern University - Kellogg School of Management Ronnie SadkaBoston 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 working papers seriesDate posted: March 28, 2002Suggested CitationContact Information
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