Momentum and Reversal Dynamics

54 Pages Posted: 4 Jan 2019

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Sang-Ook (Simon) Shin

Texas A&M University (TAMU), Mays Business School, Department of Finance, Students

Date Written: December 14, 2018

Abstract

This paper studies the joint dynamics of momentum and reversal strategies in the U.S. stock market. Momentum investors face uncertainty about whether past patterns of price movements will continue (momentum) or reverse, thereby increasing volatilities of momentum returns and occasionally leading to momentum crashes. We find that the forces that drive reversal over momentum tend to be strong if losers’ past return is extremely low in the time series or if losers are small and illiquid in the cross section. Consequently, we propose new risk-managed momentum strategies that take into account the behavioral divergence between momentum and reversal. Empirical tests for the U.S. stock markets in the sample period of 1947 to 2015 document that momentum strategies in which investors implement stop-trading rules if losers’ past returns are extremely low as well as buy-small-loser rules substantially outperform traditional momentum strategies. Importantly, we find that the outperformance is mainly attributable to the increase in abnormal returns (or alpha) from various factor models.

Keywords: momentum, reversal, stock returns

JEL Classification: C35, C49, G21, G18

Suggested Citation

Kolari, James W. and Shin, Sang-Ook (Simon), Momentum and Reversal Dynamics (December 14, 2018). Available at SSRN: https://ssrn.com/abstract=3301545 or http://dx.doi.org/10.2139/ssrn.3301545

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Sang-Ook (Simon) Shin

Texas A&M University (TAMU), Mays Business School, Department of Finance, Students ( email )

430 Wehner
College Station, TX 77843-4218
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
79
Abstract Views
302
rank
303,546
PlumX Metrics