Can Momentum Strategies Deliver under All States? Evidence from the London Stock Exchange
Posted: 12 Dec 2008
Date Written: December 10, 2008
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: Suggested Citation