Short-Term Momentum

66 Pages Posted: 17 Apr 2018 Last revised: 8 Nov 2019

See all articles by Mamdouh Medhat

Mamdouh Medhat

City University London - Sir John Cass Business School

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: October 30, 2019

Abstract

We document a striking pattern in the cross section of U.S. and international stock returns: double sorting on the previous month's return and share turnover results in significant short-term reversal among low-turnover stocks whereas high-turnover stocks exhibit short-term momentum. Short-term momentum is as profitable and persistent as conventional momentum, is exclusively a large-cap phenomenon, and survives transaction costs. Using a tractable yet flexible model, we illustrate how our results are difficult to reconcile with rational expectations but are in line with inefficient use of the information conveyed by prices. We derive novel predictions about the effects of liquidity trading and the link to fundamentals for which we find supporting evidence.

The figure shows average returns to three strategies that buy the previous month’s winners and short the previous month’s losers: A conventional short-term reversal strategy; a short-term reversal* strategy that trades in low-turnover stocks; and a short-term momentum strategy that trades in high-turnover stocks.

Keywords: Momentum, Reversal, Cursed Expectations Equilibrium, Return Predictability

JEL Classification: G12, G14

Suggested Citation

Medhat, Mamdouh and Schmeling, Maik, Short-Term Momentum (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=3150525 or http://dx.doi.org/10.2139/ssrn.3150525

Mamdouh Medhat

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/mamdouhmedhatresearch/

Maik Schmeling (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,304
Abstract Views
4,883
rank
15,383
PlumX Metrics