Are Momentum Profits Robust to Trading Costs?

Journal of Finance, Vol. 59, No. 3, pp. 1039-1082, June 2004

Posted: 29 Dec 2004

Multiple version iconThere are 2 versions of this paper

Abstract

We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non-proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break-even fund sizes that lead to zero abnormal returns. In addition to equal- and value-weighted momentum strategies, we derive a liquidity-weighted strategy designed to reduce the cost of trades. Equal-weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity-weighted and hybrid liquidity/value-weighted strategies have the largest break-even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish.

Keywords: Momentum strategies, transaction costs, price impact, optimal trading, market efficiency

JEL Classification: G11, G14

Suggested Citation

Korajczyk, Robert A. and Sadka, Ronnie, Are Momentum Profits Robust to Trading Costs?. Journal of Finance, Vol. 59, No. 3, pp. 1039-1082, June 2004, Available at SSRN: https://ssrn.com/abstract=545162

Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive, Room 4357
Evanston, IL 60208-0898
United States
847-491-8336 (Phone)
847-491-7781 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States