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Explaining Momentum Strategies Using Intrinsic Price Fluctuations

63 Pages Posted: 27 Aug 2011 Last revised: 7 Jan 2012

Nick Baltas

Imperial College Business School; Goldman Sachs International

Date Written: December 6, 2011

Abstract

This paper focuses on cross-sectional equity momentum patterns by modeling a stock’s price path as the interaction between a long-term growth component and a number of fluctuating price components that oscillate around the long-term trend at various distinct frequencies. Using this specification, the results are consistent with a behavioural overreaction-to-private-information and underreaction-to- public-information explanation of cross-sectional explanation of momentum patterns. Cross-sectional momentum profitability is found to be robust to realistic transaction costs and a 6-month holding period appears to be the optimal tradeoff investment horizon between the short-term and the longer-term effect of the transaction costs. Simple stop-loss rules are shown to improve the performance of strategies with long-term holding horizon by discarding big and growth stocks, which achieve higher levels of price efficiency and therefore realise their momentum potential faster than small and value stocks.

Keywords: Momentum, Price Trend, Transaction Costs, Stop-Loss, Empirical Mode Decomposition, Ensemble Empirical Mode Decomposition

JEL Classification: D23, E3, G14

Suggested Citation

Baltas, Nick, Explaining Momentum Strategies Using Intrinsic Price Fluctuations (December 6, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1917606 or http://dx.doi.org/10.2139/ssrn.1917606

Nick Baltas (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom

Goldman Sachs International

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom

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