Short-Term Momentum

71 Pages Posted: 17 Apr 2018 Last revised: 9 Nov 2018

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: November 8, 2018

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 strong and significant short-term reversal for low-turnover stocks whereas high-turnover stocks exhibit short-term momentum. Short-term momentum is as profitable and persistent as conventional momentum, is significant among the largest stocks, and survives transaction costs. Consistent with our model, in which turnover arises as a measure of disagreement, low-turnover reversal is due to noise trading whereas high-turnover momentum reflects gradual information diffusion. Consequently, purging noise trades from the previous month's return and turnover generates even stronger short-term momentum.



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, disagreement, informed trading, return predictability

JEL Classification: G12, G14

Suggested Citation

Medhat, Mamdouh and Schmeling, Maik, Short-Term Momentum (November 8, 2018). 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

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