Absolute Strength: Exploring Momentum in Stock Returns
73 Pages Posted: 1 Aug 2015 Last revised: 8 Aug 2018
Date Written: July 31, 2018
We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have signifi cantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have signifi cantly 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 signifi cant upward trend, while losers are those that have experienced a signifi cant downward trend, and stocks with no momentum have cumulative returns that are not signi ficantly different from zero. Absolute strength momentum generates large and signi ficant risk-adjusted returns, outperforms the relative strength momentum strategy of Jegadeesh and Titman (1993) and other prominent momentum strategies, and its profi tability is consistent across sample periods, international markets, asset classes, and holding periods.
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