Trading Strategies Based on Past Returns – Evidence from Germany

Abstract

Among the various strategies studied in this paper, only momentum investing appears to earn persistently non-zero returns: from 1965 to 2014, the classical momentum strategy based on performance over the previous two to twelve months earned an average return of 1.57% per month (excluding microcap stocks and value-weighted returns). In the most recent ten-year time period, this return has been even larger – 2.27% – which is much larger than in the U.S. However, the profitability net of transaction costs appears weak because the strategy involves trading in disproportionately small stocks with high transaction costs; this has been observed for the loser portfolio in particular. A strategy that concentrates only on the winner portfolio and, thus, avoids potential problems associated with (short) selling the costly loser portfolio appears to earn strong and persistently abnormal profits, even after transaction costs.

Keywords: momentum, stock reversal, contrarian, transaction costs, predictability

JEL Classification: G11, G12