Has Momentum Lost Its Momentum?

47 Pages Posted: 6 Sep 2018 Last revised: 16 Sep 2018

See all articles by Debarati Bhattacharya

Debarati Bhattacharya

Duquesne University

Wei-Hsien Li

National Central University at Taiwan - Department of Finance

Gokhan Sonaer

Duquesne University

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2017

Abstract

We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2012. We find that momentum profits have become insignificant since the late 1990s. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Momentum profits remain insignificant in tests designed to control for seasonality, up or down market conditions, firm size and liquidity. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest two other possible explanations for the declining momentum profits, besides uncovering of the anomaly by investors, that involve decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.

Keywords: Momentum, Market Efficiency, Market Anomaly, Asset Pricing

JEL Classification: G12, G14

Suggested Citation

Bhattacharya, Debarati and Li, Wei-Hsien and Sonaer, Gokhan, Has Momentum Lost Its Momentum? (January 1, 2017). Review of Quantitative Finance and Accounting, Vol. 48, No. 1, 2017. Available at SSRN: https://ssrn.com/abstract=3239593

Debarati Bhattacharya (Contact Author)

Duquesne University ( email )

600 Forbes Ave.
Pittsburgh, PA 15282
United States
412.396.2621 (Phone)

HOME PAGE: http://www.duq.edu/academics/schools/business/faculty/bhattacharya-phd-debarati

Wei-Hsien Li

National Central University at Taiwan - Department of Finance ( email )

No. 300, Jung-da Rd.
Jung-Li
Taoyuan
Taiwan

Gokhan Sonaer

Duquesne University ( email )

600 Forbes Avenue
Pittsburgh, PA 15282
United States
4123964315 (Phone)
4123964764 (Fax)

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