Enhancing the Profitability of Earnings Momentum Strategies: The Role of Price Momentum, Information Diffusion and Earnings Uncertainty

Journal of Investment Strategies, Vol. 2, No. 4, 2013

51 Pages Posted: 18 Apr 2011 Last revised: 8 Oct 2013

Marc-Gregor Czaja

Allianz Investment Management

Philipp Kaufmann

University of Muenster

Hendrik Scholz

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg

Date Written: April 11, 2013

Abstract

Recent literature indicates that stock characteristics proxying for behavioral biases reinforce the earnings momentum effect. Using data from the investable German HDAX, we analyze whether returns of earnings momentum strategies can be enhanced in a way that not only survives common risk adjustments but also maintains profitability after trading costs. For our liquid stock universe, we find that the rate of information diffusion has the strongest impact. A bivariate sort on earnings momentum and market capitalization yields gross Carhart alphas of up to 22% per year. The abnormal returns are largely robust to reasonable levels of trading costs.

Keywords: Analysts’ Earnings Forecast Revisions, Earnings Momentum, Post-Revision Price Drift, Portfolio Management, Market Efficiency

JEL Classification: G11, G12, G14

Suggested Citation

Czaja, Marc-Gregor and Kaufmann, Philipp and Scholz, Hendrik, Enhancing the Profitability of Earnings Momentum Strategies: The Role of Price Momentum, Information Diffusion and Earnings Uncertainty (April 11, 2013). Journal of Investment Strategies, Vol. 2, No. 4, 2013. Available at SSRN: https://ssrn.com/abstract=1812980 or http://dx.doi.org/10.2139/ssrn.1812980

Marc-Gregor Czaja

Allianz Investment Management ( email )

Reinsburgstr. 19
Stuttgart, 70178
Germany
+49-711-663-2122 (Phone)
+49-711-663-82122 (Fax)

HOME PAGE: http://www.allianz.com

Philipp Kaufmann (Contact Author)

University of Muenster ( email )

Am Stadtgraben 9
Muenster, D-48143
Germany
+49 (0)251 - 83 22 846 (Fax)

Hendrik Scholz

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg ( email )

Finance and Banking
Lange Gasse 20
Nürnberg, Bavaria 90403
Germany
0049-911-5302649 (Phone)
0049-911-5302466 (Fax)

HOME PAGE: http://www.finanzierung.wiso.uni-erlangen.de

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