Low-Cost Momentum Strategies

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

Xiafei Li

Nottingham University Business School

Chris Brooks

University of Reading - ICMA Centre

Joëlle Miffre

EDHEC 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, Joëlle, 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

Nottingham University Business School ( email )

Jubilee Campus
Nottingham, NG8 1BB
United Kingdom
+44 (0)115 9518603 (Phone)

Chris Brooks

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Joelle Miffre (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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