Investment-Momentum: A Two-Dimensional Behavioral Strategy

Abstract

We propose an investment-momentum strategy of buying past winners with low investment and selling past losers with high investment, which simultaneously exploits two dimensions of market inefficiencies. The new strategy generates twice the monthly returns earned by either the price momentum or investment strategy (1.44% vs 0.75% or 0.61%). Despite the diminishing anomalies in recent decades, the investment-momentum stays persistent. The mispricing-based strategy performs better in periods of high investor sentiment or for stocks with high limits-to-arbitrage, which is consistent with our expectations. Overall, we show that one can simultaneously use multiple dimensions of market inefficiency to attain superior performance.

Keywords: Investment momentum, price momentum, corporate investment, mispricing, behavioural finance

JEL Classification: G12; G14