Absolute Strength: Exploring Momentum in Stock Returns

59 Pages Posted: 1 Aug 2015 Last revised: 26 Sep 2015

Huseyin Gulen

Purdue University - Krannert School of Management

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance

Date Written: September 10, 2015

Abstract

We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have significantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have significantly decreased in value (absolute strength losers) continue to lose in the near future. Absolute strength winner and loser portfolio breakpoints are recursively determined by the historical distribution of realized cumulative returns across time and across stocks. The historical distribution yields stable breakpoints that are always positive (negative) for the winner (loser) portfolios. As a result, winners are those that have experienced a significant upward trend, losers are those that have experienced a significant downward trend, and stocks with no momentum have cumulative returns that are not significantly different from zero. The absolute strength momentum strategy is related to, but different from, the relative strength strategy of Jegadeesh and Titman (1993). Time-series regressions show that the returns to the absolute strength momentum strategy completely explain the returns to the relative strength strategy, but not vice versa. Absolute strength momentum does not expose investors to severe crashes during crisis periods, and its profits are remarkably consistent over time. For example, an 11-1-1 strategy that buys absolute strength winners and sells absolute strength losers delivers a risk-adjusted return of 2.42% per month from 1965-2014 and 1.55% per month from 2000-2014.

Suggested Citation

Gulen, Huseyin and Petkova, Ralitsa, Absolute Strength: Exploring Momentum in Stock Returns (September 10, 2015). Available at SSRN: https://ssrn.com/abstract=2638004 or http://dx.doi.org/10.2139/ssrn.2638004

Huseyin Gulen (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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