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

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

See all articles by Usman Ali

Usman Ali

Pacific Investment Management Company (PIMCO)

Kent D. Daniel

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (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)

Pacific Investment Management Company (PIMCO) ( email )

United States

Kent D. Daniel

Columbia University - Columbia Business School, Finance ( email )

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Hirshleifer

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
600
Abstract Views
2,386
rank
62,275
PlumX Metrics