Evolution of Historical Prices in Momentum Investing

48 Pages Posted: 3 Aug 2017

See all articles by Li-Wen Chen

Li-Wen Chen

National Chung Cheng University

Hsin-Yi Yu

University of Edinburgh - Organisation Studies; National University of Kaohsiung; University of Edinburgh - Accounting and Finance

Wen-Kai Wang

National University of Kaohsiung - Department of Finance

Date Written: July 26, 2017

Abstract

We find that the acceleration and deceleration patterns of historical prices are predictive of future expected returns in momentum investing in the U.S. equity market from 1962 to 2014. Winners with accelerated historical price increases deliver higher future expected returns and losers with accelerated historical price decreases perform more poorly in the future. Hence, the profit from buying past accelerated winners and shorting past accelerated losers is significantly higher than the momentum profit by 51.47%. Such profit cannot be subsumed by certain characteristics that have been considered to explain momentum. Possible explanations for our results include extrapolative bias and overreaction.

Keywords: Momentum, Historical price evolution, Extrapolation; Overreaction

JEL Classification: G10, G12, G14

Suggested Citation

Chen, Li-Wen and Yu, Hsin-Yi and Wang, Wen-Kai, Evolution of Historical Prices in Momentum Investing (July 26, 2017). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3009059

Li-Wen Chen

National Chung Cheng University ( email )

Min-Shiung, Chia-Yi, 621
Taiwan

Hsin-Yi Yu (Contact Author)

University of Edinburgh - Organisation Studies ( email )

50 George Square
William Robertson Building
Edinburgh EH8 9JY
UNITED KINGDOM

National University of Kaohsiung ( email )

Kaohsiung, 803
Taiwan

University of Edinburgh - Accounting and Finance ( email )

William Robertson Building
Edinburgh EH8 9JY
United Kingdom

Wen-Kai Wang

National University of Kaohsiung - Department of Finance ( email )

700 Kaohsiung University Rd.
Nanzih District
Kaohsiung 803
Taiwan

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