Investment-Momentum: A Two-Dimensional Behavioral Strategy

33 Pages Posted: 13 Mar 2019

See all articles by Fangming Xu

Fangming Xu

University of Bristol

Huainan Zhao

Loughborough University - School of Business and Economics

Liyi Zheng

University of Bristol

Date Written: February 22, 2019

Abstract

We propose an investment-momentum strategy of buying past winners with low investment and selling past losers with high investment, which exploits simultaneously two dimensions of market inefficiencies. The new strategy generates twice the monthly returns earned by either the price momentum or investment strategy (1.44% vs. 0.75% or 0.61%) for 1965-2015. Despite of the diminishing anomalies in recent decades, the investment-momentum stays persistent. The mispricing-based strategy performs better in periods of high investor sentiment or for stocks with high limits-to-arbitrage, which is consistent with our expectation. Overall, we show that, in addition to “fundamentals” enhanced momentum strategies, one can simultaneously condition on multi-dimension of inefficiencies to attain superior performance.

Keywords: Investment-momentum, Price momentum, Corporate investment, Mispricing, Behavioral finance

JEL Classification: G12; G14

Suggested Citation

Xu, Fangming and Zhao, Huainan and Zheng, Liyi, Investment-Momentum: A Two-Dimensional Behavioral Strategy (February 22, 2019). Available at SSRN: https://ssrn.com/abstract=3346289 or http://dx.doi.org/10.2139/ssrn.3346289

Fangming Xu

University of Bristol ( email )

School of Accounting and Finance
Marie Dutordoir
Bristol, BS8 1PQ
United Kingdom
+44(0)1173941503 (Phone)

HOME PAGE: http://https://research-information.bris.ac.uk/en/persons/fangming-xu

Huainan Zhao (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Liyi Zheng

University of Bristol ( email )

United Kingdom
00441173941286 (Phone)

HOME PAGE: http://www.bristol.ac.uk/efm/people/liyi-zheng/index.html

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