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Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics

Pavel Bandarchuk

State Street Global Advisors

Jens Hilscher

University of California, Davis

September 7, 2011

Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.

Number of Pages in PDF File: 48

Keywords: Momentum, Past Returns, Volatility, Stock-Level Characteristics, Double Sorts

JEL Classification: G11, G12, G14

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Date posted: December 23, 2010 ; Last revised: September 12, 2011

Suggested Citation

Bandarchuk, Pavel and Hilscher, Jens, Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics (September 7, 2011). Available at SSRN: https://ssrn.com/abstract=1729741 or http://dx.doi.org/10.2139/ssrn.1729741

Contact Information

Pavel Bandarchuk
State Street Global Advisors ( email )
Boston, MA
United States
Jens Hilscher (Contact Author)
University of California, Davis ( email )
One Shields Avenue
Davis, CA 95616
United States
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References:  52
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