From Extinction to Resurrection: Unveiling the Role of Short-Selling Frictions in Cross-Sectional Momentum
37 Pages Posted: 8 Feb 2024
Date Written: January 19, 2024
An extensive literature supports that a cross-sectional momentum strategy, going long winners and short losers’ stocks, yields substantial abnormal returns. This evidence challenges conventional asset pricing theories and has been considered important evidence against the EMH. Our study reveals that the classic momentum effect has almost disappeared in the last 25 years. We collected data on short interest to investigate the role played by short-selling frictions in this market evolution. Controlling for short interest, the momentum effect re-emerges very persuasively, even in the latest period. These novel results align with the DSGE framework proposed by Scheinkman and Xiong (2003), linking short-selling constraints to the dynamics of asset pricing and aiding in the understanding of the economics of cross-sectional momentum.
Keywords: Empirical Asset Pricing, Momentum, Short-selling frictions
JEL Classification: G10, G11, G14
Suggested Citation: Suggested Citation