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Persistency of the Momentum Effect

48 Pages Posted: 28 Aug 2015 Last revised: 23 Aug 2016

Hong-Yi Chen

National Chengchi University - Department of Finance

Pin-Huang Chou

National Central University

Date Written: August 2016

Abstract

Momentum profits, resulting from buying winners and selling losers, are robust in the stock market worldwide. However, more than 40% of winners and losers immediately fall out of their respective groups in the month following formation, suggesting that intermediate-term momentum persistency is not universal among all stocks with extreme past performance. The return reversals that these nonpersistent winners and losers exhibit in the month following formation are strong, resulting in a monthly loss of more than 17% for a momentum strategy constructed on such stocks. By contrast, persistent winners and losers, defined as those staying in their groups for at least one more month, exhibit much stronger performance persistency. Further analysis indicates that the persistency is stronger for stocks with greater information asymmetry and more extensively heterogeneous investor beliefs, consistent with the underreaction hypothesis for price momentum.

Keywords: Delayed reaction hypothesis; Duration; Persistent losers; Persistent momentum strategy; Persistent winners; Heterogeneous beliefs; Information asymmetry

JEL Classification: G11, G14

Suggested Citation

Chen, Hong-Yi and Chou, Pin-Huang, Persistency of the Momentum Effect (August 2016). Available at SSRN: https://ssrn.com/abstract=2652592 or http://dx.doi.org/10.2139/ssrn.2652592

Hong-Yi Chen (Contact Author)

National Chengchi University - Department of Finance ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan

Pin-Huang Chou

National Central University ( email )

Department of Finance
Taoyuan, 32054
Taiwan
886-3-4227151 ext 6270 (Phone)
886-3-4252961 (Fax)

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