Trading Momentum: How Shares and Investors Behave During Momentum Periods

35 Pages Posted: 22 Aug 2016 Last revised: 12 Dec 2016

See all articles by Josh Della Vedova

Josh Della Vedova

University of Sydney Business School

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business; Financial Research Network (FIRN)

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: August 19, 2016

Abstract

In this paper we argue that momentum profits are driven by both past performance and the relative proximity to an available reference point, the 52-week high. We construct momentum-style portfolios that are driven strictly by past returns which we call ‘run’ based measures, and compare these to portfolios driven by nearness to the 52-week high, defined as ‘range’ based measures. While both run and range based construction techniques generate positive momentum profits, they appear to be driven by separate behavioural biases. Portfolios constructed on the basis of range are driven by anchoring, while those constructed based purely on past returns are driven by representativeness and the hot hand fallacy. Portfolios selected by combining run-based methods with range-based methods outperform those selected on a single metric alone.

We then undertake an analysis of order imbalance in individual and institutional investors in the six months following high and low range and run variables. The results show that individuals have significantly lower OI in all but one measure supporting that prediction that individual biases cause investors to be contrarian, thus leading to observed momentum. We lastly explore limit order use by investor class and find that all groups are sensitive to the 52 week high and significantly increase their use of limit orders. While this is not the case for past returns thus suggesting limit order use is strongly related to anchoring bias.

Keywords: Momentum, 52 Week High, Disposition Effect, limit order

JEL Classification: G02

Suggested Citation

Della Vedova, Josh and Grant, Andrew R. and Westerholm, P. Joakim, Trading Momentum: How Shares and Investors Behave During Momentum Periods (August 19, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826568 or http://dx.doi.org/10.2139/ssrn.2826568

Josh Della Vedova (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
61-2-9036-7991 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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