Informed Momentum Trading versus Uninformed 'Naive' Investors Strategies

47 Pages Posted: 10 Jan 2010 Last revised: 22 Apr 2011

See all articles by Anurag Narayan Banerjee

Anurag Narayan Banerjee

Durham Business School

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Date Written: March 10, 2011

Abstract

We construct a zero-net-worth uninformed "naive investor" who uses a random portfolio allocation strategy. We then compare the returns of the momentum strategist to the return distribution of naive investors. For this purpose we reward momentum profits relative to the return percentiles of the naive investors with scores that are symmetric around the median. The score function thus constructed is invariant and robust to risk factor models. We find that the average scores of the momentum strategies are close to zero (the score of the median) and statistically insignificant over the sample period between 1926 and 2005, various sub-sample periods including the periods examined in Jegadeesh and Titman (1993 and 2001). The findings are robust with respect to sampling or period-specific effects, tightened score intervals, and the imposition of maximum-weight restrictions on the naive strategies to mitigate market friction considerations.

Keywords: Past Stock Return Information, Momentum Strategies

JEL Classification: G11, G12, G14

Suggested Citation

Banerjee, Anurag Narayan and Hung, Chi-Hsiou Daniel, Informed Momentum Trading versus Uninformed 'Naive' Investors Strategies (March 10, 2011). Available at SSRN: https://ssrn.com/abstract=1534030 or http://dx.doi.org/10.2139/ssrn.1534030

Anurag Narayan Banerjee

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Chi-Hsiou Daniel Hung (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

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