40 Pages Posted: 24 Apr 2017 Last revised: 2 Jun 2017
Date Written: April 21, 2017
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: 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