Has Momentum Lost Its Momentum?

43 Pages Posted: 8 Jun 2016 Last revised: 10 Jun 2016

See all articles by Debarati Bhattacharya

Debarati Bhattacharya

Duquesne University - Palumbo Donahue School of Business

Wei-Hsien Li

National Central University

Gokhan Sonaer

Duquesne University

Date Written: November 6, 2015

Abstract

We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2012. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 14 years. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest three possible explanations for the declining momentum profits that involve uncovering of the anomaly by investors, decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.

Keywords: Momentum, Market efficiency, Market anomaly, Asset pricing

JEL Classification: G12, G14

Suggested Citation

Bhattacharya, Debarati and Li, Wei-Hsien and Sonaer, Gokhan, Has Momentum Lost Its Momentum? (November 6, 2015). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2791138

Debarati Bhattacharya (Contact Author)

Duquesne University - Palumbo Donahue School of Business ( email )

600 Forbes Ave.
Pittsburgh, PA 15282
United States
412.396.2621 (Phone)

HOME PAGE: http://www.duq.edu/academics/schools/business/faculty/bhattacharya-phd-debarati

Wei-Hsien Li

National Central University ( email )

No.300, Jung-da Rd.
Jhongli, 32001
Taiwan
886-3-422-7151 66128 (Phone)
886-3-425-2961 (Fax)

Gokhan Sonaer

Duquesne University ( email )

600 Forbes Avenue
Pittsburgh, PA 15282
United States
4123964315 (Phone)
4123964764 (Fax)

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