Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing

The International Journal of Business and Finance Research, v. 12 (2) p. 63-75, 2018

13 Pages Posted: 28 Feb 2019

See all articles by Zugang Liu

Zugang Liu

Pennsylvania State University Hazleton - Department of Business and Economics

Jia Wang

Rowan University

Date Written: 2018

Abstract

In this study, we investigate the return enhancement ability of style momentum strategy: a strategy that switches between value and growth styles based on previous performance. We explore the variation in abnormal returns of long-only and long-short momentum strategies using various style based indexes (Russell value/growth indexes, Fama-French value/growth indexes, and MSCI value/growth indexes) where value and growth stocks are classified using different criteria. Our results show that the performance of style momentum does vary across different index families. We first find that in general the long-only strategies create significant positive abnormal returns whereas the long-short strategies do not. Second, for a fixed formation period, abnormal returns of the strategies tend to decrease when the length of holding periods increase. Third, abnormal returns are stronger and more significant when rotating within large cap value and growth indexes while abnormal returns are weaker and inconsistent when rotating within small cap value and growth indexes. Fourth, strategies based on rotating across all market cap levels do not generate consistently significant positive abnormal returns for Russell indexes or Fama-French indexes but they do for MSCI indexes. Fifth, individual stock momentum only explains a very small portion of the returns of style moment strategies

Keywords: Style Momentum, Value, Growth, Large Cap, Small Cap

JEL Classification: G11

Suggested Citation

Liu, Zugang and Jia, Wang, Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing (2018). The International Journal of Business and Finance Research, v. 12 (2) p. 63-75, 2018, Available at SSRN: https://ssrn.com/abstract=3241701

Zugang Liu (Contact Author)

Pennsylvania State University Hazleton - Department of Business and Economics ( email )

76 University Drive
Hazleton, PA 18202
United States

Wang Jia

Rowan University ( email )

201 Mullica Hill Road
Glassboro, NJ 08028
United States

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