Low-Cost Momentum Strategies

18 Pages Posted: 10 Aug 2007 Last revised: 19 May 2009

See all articles by Xiafei Li

Xiafei Li

Keele Business School, Keele University; Keele Business School, Keele University

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Joëlle Miffre

Audencia Business School

Date Written: May 1, 2008

Abstract

The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement, should asset managers decide to adopt low-cost relative-strength strategies.

Keywords: Momentum profits, Transaction costs, Low-cost strategy

JEL Classification: G12, G19

Suggested Citation

Li, Xiafei and Brooks, Chris and Miffre, Joelle, Low-Cost Momentum Strategies (May 1, 2008). Available at SSRN: https://ssrn.com/abstract=1006165 or http://dx.doi.org/10.2139/ssrn.1006165

Xiafei Li

Keele Business School, Keele University ( email )

NG5 5AA
United Kingdom

Keele Business School, Keele University ( email )

Keele, ST5 5AA
United Kingdom

Chris Brooks

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Joelle Miffre (Contact Author)

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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