Myopic Loss Aversion: An Alternative Explanation of the Momentum Premium

42 Pages Posted: 20 Aug 2015

See all articles by Gareth Hurst

Gareth Hurst

University of Newcastle (Australia)

Paul Docherty

The Brattle Group

Date Written: August 20, 2015

Abstract

Returns to both traditional and risk-managed momentum strategies are non-normal, reducing the efficacy of the Sharpe ratio as an evaluation tool. To account for the higher moments of the return distribution, we evaluate momentum using the framework of myopic loss aversion. Under this framework, traditional momentum strategies are no longer anomalous and risk-managed strategies can be explained where institutional investors frequently evaluate their portfolios. We extend this result and explore the impact of myopia over an international sample. Consistent with the predictions of myopic loss aversion, we find that the momentum premium is higher for countries that are predisposed to myopia. We therefore argue that myopic loss aversion provides an alternative explanation for the momentum premium.

Keywords: Myopic loss aversion; momentum drawdown; cumulative prospect theory; culture

JEL Classification: G11, G12

Suggested Citation

Hurst, Gareth and Docherty, Paul, Myopic Loss Aversion: An Alternative Explanation of the Momentum Premium (August 20, 2015). Available at SSRN: https://ssrn.com/abstract=2647847 or http://dx.doi.org/10.2139/ssrn.2647847

Gareth Hurst (Contact Author)

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

Paul Docherty

The Brattle Group ( email )

44 Brattle Street
3rd Floor
Cambridge, MA 02138-3736
United States

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