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Explaining Momentum Strategies Using Intrinsic Price Fluctuations

Nick Baltas

Imperial College Business School; UBS Investment Bank

December 6, 2011

24th Australasian Finance and Banking Conference 2011 Paper

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.

Number of Pages in PDF File: 63

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

JEL Classification: D23, E3, G14

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Date posted: August 27, 2011 ; Last revised: January 7, 2012

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

Contact Information

Nick Baltas (Contact Author)
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
UBS Investment Bank ( email )
1 Finsbury Avenue
London, EC2M 2PP
United Kingdom
+442075683072 (Phone)
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