Are Anomalies Still Anomalous? An Examination of Momentum Strategies in Four Financial Markets

Abstract

In this paper we test the profitability of momentum strategies in the United Kingdom, Germany, Japan, and China over the period 1991 to 2006 and sub-periods. Both RSS (Relative Strength Strategies) and WRSS (Weighted Relative Strength Strategies) are used to form the momentum portfolios. As a result, we find that the United Kingdom and Germany exhibit rather stable medium-term return continuation for both RSS and WRSS over the entire sample period and sub-periods, while Japan shows a medium-term return reversal over the sub-period 1991-1998. As for China, we report momentum profits over the period 1995-2006 and the sub-period 2001-2006 with RSS. Furthermore, we use the results of RSS to check the influence of risk factors and transaction costs on the momentum returns, as well as calendar effects and other characteristics of momentum portfolios reported in the literature. With the results of WRSS, we examine the relative importance of time-series predictability and cross-sectional variation in accounting for the profits of momentum strategies.

Keywords: Momentum Strategy, Time-Series Predictable Components, Cross-Sectional Variation

JEL Classification: G11, 141, G15