Can Momentum Strategies Deliver under All States? Evidence from the London Stock Exchange

Posted: 12 Dec 2008

See all articles by Sina H. Badreddine

Sina H. Badreddine

Durham Business School

Emilios C. Galariotis

Audencia Business School ; Audencia Nantes School of Management

Phil Holmes

Durham University

Date Written: December 10, 2008

Abstract

Evidence suggests that once anomalies, such as the small firm and weekend effects, are identified, they subsequently cease to exist. This paper uses UK data to examine whether momentum profits have also been subject to a disappearance in recent years. Results show that momentum weakened after 2000, with only 37% of strategies profitable, compared to 100% earlier. Given recent changes in market conditions and evidence of market states affecting momentum in the US (Cooper et al, 2004), any fading momentum effect could result from the interaction of market states and momentum. We, therefore, examine whether the interaction identified by Cooper et al also exists for the UK. Employing overlapping and non-overlapping portfolios, controlling for low price firm effects, infrequent trading, bid ask biases and risk, we conclude that market states do not affect UK momentum strategies, that on the whole appear to be profitable. However, profits appear to be driven by loser portfolios and, hence, it is questionable whether such profits are achievable in practice.

Keywords: Market states, momentum, overreaction, underreaction, London Stock Exchange

JEL Classification: G1

Suggested Citation

Badreddine, Sina H. and Galariotis, Emilios C. and Holmes, Phil, Can Momentum Strategies Deliver under All States? Evidence from the London Stock Exchange (December 10, 2008). Available at SSRN: https://ssrn.com/abstract=1314404

Sina H. Badreddine (Contact Author)

Durham Business School ( email )

Dept. of Economics & Finance 23-26 Old Elvet
Durham Business School
Durham, DH1 3HY
United Kingdom

Emilios C. Galariotis

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Audencia Nantes School of Management ( email )

France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Phil Holmes

Durham University ( email )

Dept. of Economics & Finance 23-26 Old Elvet
Durham DH1 3HY
United Kingdom
+44 191 374 5975 (Phone)
+44 191 374 7289 (Fax)

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