The Seasonality of Momemtum: Analysis of Tradability
Northwestern University Department of Finance Working Paper No. 277
32 Pages Posted: 5 Apr 2002
Date Written: January 23, 2002
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: Suggested Citation