Are Momentum Profits Robust to Trading Costs?

Northwestern University Department of Finance Working Paper No. 289; AFA 2003 Washington, DC Meetings

43 Pages Posted: 28 Mar 2002  

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2003

Abstract

This paper tests whether momentum-based strategies remain profitable after considering market frictions, in particular price concessions induced by trading. Alternative measures of price impact are estimated and applied to alternative momentum-based trading rules. The performance of traditional momentum strategies, in addition to strategies designed to reduce the cost of trades, is evaluated. We find that, after taking into account the price impact induced by trades, as much as 5 billion dollars (relative to December 1999 market capitalization) may be invested in some momentum-based strategies before the apparent profit opportunities vanish. Other, extensively studied, momentum strategies are not implementable on a large scale. The persistence of momentum returns exhibited in the data remains an important challenge to the asset-pricing literature.

Notes: Previously titled On the Financial Significance of Momentum

Keywords: Momentum strategies, Transaction costs, Price impact, Optimal trading, Market efficiency

JEL Classification: G11, G14

Suggested Citation

Korajczyk, Robert A. and Sadka, Ronnie, Are Momentum Profits Robust to Trading Costs? (April 18, 2003). Northwestern University Department of Finance Working Paper No. 289; AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=305282 or http://dx.doi.org/10.2139/ssrn.305282

Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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