Dissecting Stock Price Momentum Using Financial Statement Analysis
61 Pages Posted: 4 Jul 2016
Date Written: June 27, 2016
An extensive literature on stock price momentum documents that past price performance predicts future price performance (over the next 3-12 months). I argue that past price performance could be driven either by informed investors or by noise traders and financial statement analysis (FSA) can help distinguish between these two drivers of past returns. I show that stocks where past price performance is consistent with fundamentals exhibit greater momentum and earn larger risk-adjusted returns than a pure momentum-based trading strategy. Furthermore, these returns have lower volatility, reduce portfolio turnover, and produce significantly higher ex-post Sharpe ratios. Meanwhile, stocks with past price performance that is inconsistent with fundamentals exhibit reversals. Overall, my evidence documents new and robust evidence on the usefulness of FSA.
Keywords: Momentum, Fundamental Analysis, Financial Statement Analysis
JEL Classification: G11, G12, M41
Suggested Citation: Suggested Citation