Persistency of the Momentum Effect
48 Pages Posted: 28 Aug 2015 Last revised: 23 Aug 2016
Date Written: August 2016
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: Suggested Citation