The Impact of Liquidity and Transaction Costs on the 52-Week High Momentum Strategy in Australia

Australian Journal of Management, Vol. 35, No. 3, pp. 227-244, 2010

Posted: 2 Apr 2011

See all articles by Jenni L. Bettman

Jenni L. Bettman

Australian National University (ANU)

Stephen Sault

Australian National University (ANU); Financial Research Network (FIRN)

Anna Helen von Reibnitz

Australian National University (ANU); Financial Research Network (FIRN)

Date Written: December 1, 2010

Abstract

In this paper we investigate the profitability of the 52-week high momentum strategy in the Australian equity market over the period 1996-2008. We provide the first examination of the economic significance of the strategy by applying short-sale restrictions and utilizing bid-and-ask prices and trading volume to proxy for transaction costs and liquidity constraints, respectively. Testing reveals that the strategy yields significantly positive raw returns when concentrated purely on the more liquid stocks in the market, with significantly negative returns evident among illiquid stocks. This suggests that the anchor-and-adjust bias on which the strategy is based only exists among stocks with sufficient liquidity. Furthermore, the 52-week high strategy comprising liquid stocks fails to produce significant dollar profits once short-sale restrictions, transaction costs and liquidity constraints are accounted for. We therefore conclude that the 52-week high momentum trading strategy is not of practical use to investors in Australia.

Keywords: 52-week high,economic significance, momentum

JEL Classification: G14

Suggested Citation

Bettman, Jenni L. and Sault, Stephen and von Reibnitz, Anna Helen, The Impact of Liquidity and Transaction Costs on the 52-Week High Momentum Strategy in Australia (December 1, 2010). Australian Journal of Management, Vol. 35, No. 3, pp. 227-244, 2010, Available at SSRN: https://ssrn.com/abstract=1800754

Jenni L. Bettman (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Stephen Sault

Australian National University (ANU) ( email )

Canberra ACT 0200, 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Anna Helen Von Reibnitz

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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