The Seasonality of Momemtum: Analysis of Tradability

Northwestern University Department of Finance Working Paper No. 277

32 Pages Posted: 5 Apr 2002

See all articles by Ronnie Sadka

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: January 23, 2002

Abstract

This paper shows that momentum-based strategies have exhibited high excess returns during the last several decades, especially in December and January. The effect of trading on prices, however, limits the amount that can be invested in such strategies. We find that after taking into account the price impact induced by trades, no more than $200 million can be invested before the apparent profit opportunities vanish. Thus, despite the failure of factor models to explain the persistence of momentum returns at the turn-of-the-year, actual trading does not award abnormal profits. Thus, the existence of momentum seasonality does not contradict the efficient market hypothesis.

Keywords: Momentum strategies, Transaction costs, Price impact, Market efficiency, January effect

JEL Classification: G11, G14

Suggested Citation

Sadka, Ronnie, The Seasonality of Momemtum: Analysis of Tradability (January 23, 2002). Northwestern University Department of Finance Working Paper No. 277, Available at SSRN: https://ssrn.com/abstract=306371 or http://dx.doi.org/10.2139/ssrn.306371

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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