One Brief Shining Moment(um): Past Momentum Performance and Momentum Reversals

40 Pages Posted: 24 Apr 2017 Last revised: 2 Jun 2017

Usman Ali

MIG Capital

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Date Written: April 21, 2017

Abstract

Motivated by behavioral theories, we test whether recent past performance of the momentum strategy (Past Momentum Performance--PMP) negatively predicts the performance of stale momentum portfolios. Following periods of top-quintile PMP, momentum portfolios exhibit strong reversals 2-5 years after formation, whereas, following periods of bottom-quintile PMP, stale momentum portfolios earn positive returns. The difference in cumulative five-year Fama-French alphas for momentum portfolios formed in high- and low-PMP months is 40%. A value-weighted trading strategy based on this effect generates an alpha of 0.40% per month (t = 3.74). These patterns are confirmed in international data. These findings present a puzzle for existing theories of momentum.

Suggested Citation

Ali, Usman and Daniel, Kent D. and Hirshleifer, David A., One Brief Shining Moment(um): Past Momentum Performance and Momentum Reversals (April 21, 2017). Columbia Business School Research Paper No. 17-48. Available at SSRN: https://ssrn.com/abstract=2956493 or http://dx.doi.org/10.2139/ssrn.2956493

Usman Ali (Contact Author)

MIG Capital ( email )

Newport Beach, CA 92660
United States

Kent D. Daniel

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4679 (Phone)
212-854-4679 (Fax)

HOME PAGE: http://www.columbia.edu/~kd2371/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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